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<SEC-DOCUMENT>0000950152-05-002013.txt : 20050311
<SEC-HEADER>0000950152-05-002013.hdr.sgml : 20050311
<ACCEPTANCE-DATETIME>20050311160528
ACCESSION NUMBER: 0000950152-05-002013
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 19
CONFORMED PERIOD OF REPORT: 20041231
FILED AS OF DATE: 20050311
DATE AS OF CHANGE: 20050311
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: EATON CORP
CENTRAL INDEX KEY: 0000031277
STANDARD INDUSTRIAL CLASSIFICATION: MISC INDUSTRIAL & COMMERCIAL MACHINERY & EQUIPMENT [3590]
IRS NUMBER: 340196300
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 333-56644
FILM NUMBER: 05675647
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
CITY: CLEVELAND
STATE: OH
ZIP: 44114
FORMER COMPANY:
FORMER CONFORMED NAME: EATON YALE & TOWNE INC
DATE OF NAME CHANGE: 19710822
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>l12544ae10vk.txt
<DESCRIPTION>EATON CORPORATION 10-K
<TEXT>
<PAGE>
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, 2004
------------------------------------
Commission file number 1-1396
-----------------------------
Eaton Corporation
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Ohio 34-0196300
------------------------ ------------------------------------
(State of incorporation) (I.R.S. Employer Identification No.)
</TABLE>
<TABLE>
<S> <C>
Eaton Center, Cleveland, Ohio 44114-2584
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
</TABLE>
(216) 523-5000
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of each exchange on
Title of each class which registered
- ------------------------------ ---------------------------
<S> <C>
Common Shares ($.50 par value) The New York Stock Exchange
The Chicago Stock Exchange
The Pacific Exchange
</TABLE>
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. Yes X
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X
The aggregate market value of Common Stock held by non-affiliates of the
registrant as of June 30, 2004 was $9.8 billion.
As of January 31, 2005, there were 152.9 million Common Shares outstanding.
<PAGE>
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2005 annual shareholders' meeting are
incorporated by reference into Part III.
<PAGE>
Part I
Item 1. Business
- -----------------
Eaton Corporation (Eaton or Company) is a global diversified industrial
manufacturer with 2004 sales of $9.8 billion. Eaton was incorporated in Ohio in
1916, as a successor to a New Jersey company incorporated in 1911. The Company
is a global leader in the design, manufacture, marketing and servicing of fluid
power systems for industrial, mobile, and aircraft equipment; electrical systems
and components for power quality, distribution and control; automotive engine
air management systems, powertrain solutions and specialty controls for
performance, fuel economy and safety; and intelligent truck drivetrain systems
for safety and fuel economy. Headquartered in Cleveland, Ohio, Eaton had 55,000
employees at year-end 2004 and sells products in more than 125 countries. More
information regarding the Company is available at http://www.eaton.com.
Eaton electronically files or furnishes reports pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States
Securities and Exchange Commission (Commission), including annual reports on
Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as
well as any amendments to those reports. As soon as reasonably practicable,
these reports are available free of charge through the Company's Internet web
site at http://www.eaton.com. These filings are also accessible on the
Commission's Internet web site at www.sec.gov.
Recent Developments
- -------------------
In light of the strong results for 2004 and continuing momentum in most of its
markets, on January 24, 2005 Eaton announced that it was taking the following
actions:
- - Increasing the quarterly dividend on its Common Shares by 15%, from $.27
per share to $.31 per share, effective for the February 2005 dividend;
- - Initiating a plan to repurchase $250 million of shares to help offset
dilution from the shares issued during 2004 from the exercise of stock
options;
- - Contributing $50 million to its qualified pension plans in the United
States during 2005.
On June 9, 2004, Eaton acquired Powerware Corporation, the power systems
business of Invensys plc, for $560 million of cash, less cash acquired of $27
million. Powerware, based in Raleigh, North Carolina, is a global leader in
Uninterruptible Power Systems (UPS), DC Power products, and power quality
services. Powerware had revenues of $775 million for the year ended March 31,
2004. Powerware has operations in the United States, Canada, Europe, South
America and Asia/Pacific that provide products and services utilized by computer
manufacturers, industrial companies, governments, telecommunications firms,
medical institutions, data centers and other businesses. Eaton's operating
results for 2004 include Powerware from the date of acquisition. This business
is included in the Electrical segment.
On September 1, 2004, Eaton acquired Walterscheid Rohrverbindungstechnik GmbH
(Walterscheid) from GKN plc for $48 million of cash. Walterscheid, a
manufacturer of hydraulic tube connectors and fittings primarily for the
European market, had 2003 sales of $52 million and is located in Lohmar,
Germany. Its products are used in mobile and industrial hydraulic markets such
as construction and agricultural equipment and machine tools. Eaton's operating
results for 2004 include Walterscheid from the date of acquisition. This
business is included in the Fluid Power segment.
<PAGE>
Also in September 2004, Eaton contributed $28 million of cash to purchase a 50%
interest in a new medium-duty truck transmission joint venture located in
Changchun, China. The partner in this venture is FAW Jiefang Automotive Co.,
Ltd., which is the commercial vehicle subsidiary of China First Auto Works Group
Company (FAW), the largest manufacturer of commercial vehicles in China. Eaton's
operating results include this joint venture, which is accounted for under the
equity method, beginning in September 2004. This business is included in the
Truck segment.
Business Segment Information
- ----------------------------
Information by business segment and geographic region regarding principal
products, principal markets, methods of distribution, net sales, operating
profit and assets is presented in "Business Segment & Geographic Region
Information" on pages F-34 through F-39 of this Form 10-K. Additional
information regarding Eaton's segments and business is presented below.
Fluid Power
- -----------
Significant Customers - Approximately 12% of this segment's net sales in 2004
were made to four original equipment manufacturers of vehicles in the United
States and Europe. Two of these customers are also significant customers of the
Automotive and Truck segments. Also, approximately 6% of this segment's net
sales in 2004 were made to two manufacturers of off-highway agricultural and
construction vehicles.
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton has a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
Electrical
- ----------
Significant Customers - Approximately 12% of this segment's net sales in 2004
were made to one customer, located in the United States, which is not a
significant customer of any other segment.
Competition - Principal methods of competition in this segment are price,
geographic coverage, service and product performance. Eaton has a strong
competitive position in relation to the many competitors in this segment and,
with respect to many products, is considered among the market leaders.
Automotive
- ----------
Seasonal Fluctuations - Sales of the Automotive segment historically are lower
in the third quarter than in other quarters during the year as a result of the
normal seasonal pattern of automotive industry production.
Significant Customers - Approximately 56% of this segment's net sales in 2004
were made to divisions and subsidiaries of five large original equipment
manufacturers of vehicles and one automotive component supplier. All of these
customers are concentrated in North America and Europe. Three of these customers
are also significant customers of the Truck and Fluid Power segments.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton has a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
<PAGE>
Truck
- -----
Significant Customers - Approximately 75% of this segment's net sales in 2004
were made to divisions and subsidiaries of five original equipment manufacturers
of heavy-, medium-, and light-duty trucks and off-highway vehicles, concentrated
in North America, Europe and Latin America. Two of these customers are also
significant customers of the Automotive and Fluid Power segments.
Competition - Principal methods of competition in this segment are price,
service and product performance. Eaton has a strong competitive position in
relation to the many competitors in this segment and, with respect to many
products, is considered among the market leaders.
Information Concerning Eaton's Business in General
- --------------------------------------------------
Raw Materials - Principal raw materials used are iron, steel, copper, nickel,
aluminum, brass, silver, rubber, plastic and insulating materials. 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. In 2004, due to raw
materials supply shortages resulting from higher demand, Eaton paid higher
prices primarily for basic metals. At the end of 2004, the Company purchased
additional inventory to guard against basic metals shortages.
Patents and Trademarks - Eaton views its name and mark as significant to its
business as a whole.
Eaton's products are marketed with a portfolio of patents, trademarks, licenses
or other forms of intellectual property that expire at various dates in the
future. Eaton develops and acquires new intellectual property on an ongoing
basis and considers all of its intellectual property to be valuable. However,
based on the broad scope of Eaton's product lines, management believes that the
loss or expiration of any single intellectual property right would not have a
material effect on the results of operation or financial position of Eaton or
its business segments. Eaton's policy is to file applications and obtain patents
for its new products including product modifications and improvements. While
patents generally expire 20 years after the patent application filing date, new
patents are issued to Eaton on a regular basis.
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 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, 2004 and
2003 was approximately $1.5 billion and $1.3 billion, respectively. Backlog
should not be relied upon as being indicative of results of operations for
future periods.
Research and Development - Research and development expenses for new products
and improvement of existing products in 2004, 2003 and 2002 (in millions) were
$261, $223 and $203, respectively. Over the past five years, the Company has
invested approximately $1.2 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.
Eaton continues to modify certain processes on an ongoing, regular basis in
order to reduce the impact on the environment, including the reduction or
<PAGE>
elimination of certain chemicals used in, and wastes generated from, operations.
Compliance with Federal, State and local provisions which have been enacted or
adopted regulating the discharge of materials into the environment, or otherwise
relating to the protection of the environment, are not expected to have a
material adverse effect upon earnings or the competitive position of the
Company. Eaton's estimated capital expenditures for environmental control
facilities are not expected to be material for 2005 and 2006. Information
regarding the Company's liabilities related to environmental matters is
presented in "Protection of the Environment" on pages F-26 and F-27 of this Form
10-K.
Foreign Operations - Eaton's foreign operations are subject to a variety of
risks that may affect such operations, including, among other things:
- - Currency fluctuations and devaluations,
- - Exchange controls and currency restrictions, and
- - Changes in local economic conditions.
While the impact of these risks is difficult to predict, any one or more of them
could adversely affect the Company's operations in the future.
Item 2. Properties
- ------------------
Eaton's world headquarters is located in Cleveland, Ohio. The Company maintains
manufacturing facilities at 187 locations in 29 countries, including 31
light-manufacturing and fabrication facilities. The Company is a lessee under a
number of operating leases for certain real properties and equipment, none of
which is material to its operations. Management believes that the existing
manufacturing facilities are adequate for operations, and such facilities are
maintained in good condition.
Item 3. Legal Proceedings
- -------------------------
Information regarding the Company's legal proceedings is presented in
"Protection of the Environment" and "Contingencies" on pages F-26 and F-27 of
this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
Executive Officers of the Registrant
- ------------------------------------
Information regarding executive officers of the Company is presented in Item 10
of this Form 10-K.
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 and
Pacific stock exchanges. Information regarding cash dividends paid and the high
and low market price per Common Share for each quarter in 2004 and 2003 is
presented in "Quarterly Data" on page F-61 of this Form 10-K. At December 31,
2004, there were 9,641 holders of record of the Company's Common Shares.
<PAGE>
Additionally, 22,016 current and former employees were shareholders through
participation in the Eaton Savings Plan (ESP) and Eaton Personal Investment Plan
(EPIP).
Information regarding equity compensation plans required by Regulation S-K Item
201(d) is provided in Item 12 of this Form 10-K.
Item 6. Selected Financial Data
- -------------------------------
Information regarding selected financial data is presented in the "Nine-Year
Consolidated Financial Summary" on pages F-62 and F-63 of this Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
- -------------------------------------------------------------------------------
"Management's Discussion & Analysis of Financial Condition and Results of
Operations" is presented on pages F-40 through F-60 of this Form 10-K.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
- ------------------------------------------------------------------
Information regarding market risk is presented in "Market Risk Disclosure &
Contractual Obligations" on pages F-53 and F-54 of this Form 10-K.
Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The report of the independent registered public accounting firm, consolidated
financial statements, and notes to consolidated financial statements are
presented on pages F-1 and F-5 through F-39 of this Form 10-K.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial
Disclosure
- --------------------------------------------------------------------------------
None.
Item 9A. Controls and Procedures
- --------------------------------
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15,
an evaluation was performed, under the supervision and with the participation of
Eaton's management, including Alexander M. Cutler - Chairman and Chief Executive
Officer and Richard H. Fearon - Executive Vice President - Chief Financial and
Planning Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, Eaton's
management concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2004.
Disclosure controls and procedures are designed to ensure that information
required to be disclosed in Company reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Commission's rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in Company reports filed under
the Exchange Act is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting - During fourth quarter
2004, there was no change in Eaton's internal control over financial
<PAGE>
reporting that materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
"Management's Report on Internal Control Over Financial Reporting" is presented
on page F-2 of this Form 10-K.
"Report of the Independent Registered Public Accounting Firm" on "Management's
Report on Internal Control Over Financial Reporting" is presented on pages F-3
and F-4 of this Form 10-K.
Item 9B. Other Information
- --------------------------
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------
Information required with respect to the Directors of the Company is set forth
under the caption "Election of Directors" in the Company's definitive Proxy
Statement to be filed on or about March 18, 2005, and is incorporated by
reference.
A listing of Eaton's executive officers, their ages, positions and offices held
over the past five years, as of January 31, 2005, follows:
<TABLE>
<CAPTION>
Name Age Position (Date elected to position)
- ---- --- -----------------------------------
<S> <C> <C>
Alexander M. Cutler 53 Chairman and Chief Executive Officer; President
(August 1, 2000 - present)
President and Chief Operating Officer
(September 1, 1995 - July 31, 2000)
Director (1993 - present)
Richard H. Fearon 48 Executive Vice President - Chief Financial and
Planning Officer (April 24, 2002 - present)
Partner, Willow Place Partners LLC (2001 - 2002)
Senior Vice President - Corporate Development,
Transamerica Corporation (1997 - 2000)
Craig Arnold 44 Senior Vice President and Group Executive - Fluid
Power (October 25, 2000 - present)
Corporate Vice President of General Electric and
President of GE Lighting Services Ltd.
(1999 - 2000)
Stephen M. Buente 54 Senior Vice President and Group Executive -
Automotive (August 21, 2000 - present)
Operations Vice President - Automotive Controls
(1999 - 2000)
Randy W. Carson 54 Senior Vice President and Group Executive -
Electrical (January 1, 2000 - present)
James E. Sweetnam 52 Senior Vice President and Group Executive -
Truck (July 1, 2001 - present)
Vice President - Heavy-Duty Transmission, Clutch
and Aftermarket (2000 - 2001)
Kristen M. Bihary 51 Vice President - Communications
(July 28, 1999 - present)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Susan J. Cook 57 Vice President - Human Resources
(January 16, 1995 - present)
Earl R. Franklin 61 Vice President and Secretary
(April 24, 2002 - present)
Secretary and Associate General Counsel
(September 1, 1991 - April 23, 2002)
J. Robert Horst 61 Vice President and General Counsel
(January 1, 2000 - present)
James W. McGill 49 Vice President - Eaton Business System
(July 16, 2004 - present)
Vice President and General Manager - Industrial
Controls Division (January 1, 2001 - July 2004)
Director OEM Segment - Electrical Components
(September 1, 1999 - December 31, 2000)
John S. Mitchell 48 Vice President - Taxes
(November 22, 1999 - present)
Robert E. Parmenter 52 Vice President and Treasurer
(January 1, 1997 - present)
Billie K. Rawot 53 Vice President and Controller
(March 1, 1991 - present)
Robert L. Sell 54 Vice President - Chief Information Officer
(August 11, 2003 - present)
Senior Vice President, Chief Information Officer,
Moore Wallace Incorporated (2002 - 2003)
Vice President, Chief Information Officer,
Brunswick Corporation (1999 - 2001)
Ken D. Semelsberger 43 Vice President - Strategic Planning
(April 28, 1999 - present)
</TABLE>
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.
Eaton has a separately designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. The current members of
the Audit Committee are Victor A. Pelson (chair), Deborah L. McCoy, John R.
Miller and Kiran M. Patel. The Board of Directors of Eaton has determined that
John R. Miller and Kiran M. Patel are audit committee financial experts as
defined by Item 401(h) of Regulation S-K of the Exchange Act and are independent
within the meaning of Item 7(d)(3)(iv) of Schedule 14A of the Exchange Act.
The Company has adopted a Code of Ethics, which applies to the Directors,
officers (including its Chairman and Chief Executive Officer, Executive Vice
President--Chief Financial and Planning Officer, and Vice President and
Controller) and employees worldwide. The Code of Ethics is included as an
exhibit in the Company's definitive Proxy Statement to be filed on or about
March 18, 2005, and is incorporated by reference. The Board of Directors has
also approved charters for the Board's Audit Committee, Compensation and
Organization Committee, Finance Committee and Governance Committee, as well
<PAGE>
as the Board of Directors Governance Policies. These documents are available on
the Company's website at http://www.eaton.com. Printed copies are also available
free of charge upon request. Requests for printed copies should be directed to
the Company's Investor Relations Office, Eaton Corporation, 1111 Superior
Avenue, Cleveland 44114-2584.
Information required with respect to compliance with Section 16(a) of the
Exchange Act is set forth under the caption "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive Proxy Statement to be filed on
or about March 18, 2005, and is incorporated by reference.
Item 11. Executive Compensation
- -------------------------------
Information required with respect to executive compensation is set forth under
the caption "Executive Compensation" in the Company's definitive Proxy Statement
to be filed on or about March 18, 2005, and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholders Matters
- ---------------------------------------------------------------------------
Information required with respect to security ownership of certain beneficial
owners is set forth under the caption "Share Ownership Tables" in the Company's
definitive Proxy Statement to be filed on or about March 18, 2005, and is
incorporated by reference.
Equity Compensation Plans
- -------------------------
The following table summarizes information, as of December 31, 2004, relating to
equity compensation plans of the Company pursuant to which grants of options,
restricted stock, deferred compensation units or other rights to acquire Company
common shares may be granted from time to time.
<TABLE>
<CAPTION>
(C)
Number of
Securities
Remaining
(A) Available
Number of (B) for Future
Securities Weighted- Issuance
to be Average Under Equity
Issued Upon Exercise Compensation
Exercise of Price of Plans
Outstanding Outstanding (Excluding
Options, Options, Securities
Warrants Warrants Reflected in
Plan category and Rights and Rights Column (A))
- ------------- ------------ ----------- -------------
<S> <C> <C> <C>
Equity compensation
plans approved by
security holders(1) 15,298,846(3) $37.97(5) 8,972,685
Equity compensation
plans not approved
by security holders(2) 1,645,755(4) N/A (2)
---------- ------ ---------
Total 16,944,601 $37.97(5) 8,972,685
========== ====== =========
</TABLE>
<PAGE>
(1) These plans are the Company's 2004 Stock Plan, 2002 Stock Plan, 1998 Stock
Plan, 1995 Stock Plan, 1991 Stock Option Plan, and the Incentive Compensation
Deferral Plans.
(2) The 1996 Non-Employee Director Fee Deferral Plan and the Deferred Incentive
Compensation Plan are not considered to be "equity compensation plans" which
require shareholder approval under the rules of the New York Stock Exchange.
Under the 1996 Non-Employee Director Fee Deferral Plan, all non-employee
directors were entitled to defer payment of their fees at a rate of return
depending on whether the director deferred the fees as retirement compensation
or as short-term compensation. At least 50% of retirement compensation, or any
greater portion which the director elected, was converted to Company share units
and earns Company share price appreciation and dividend equivalents. The balance
of retirement compensation earns 10-year U.S. Treasury note returns plus 300
basis points. Short-term compensation earns 13-week U.S. Treasury bill returns.
These arrangements provide for accelerated lump sum or installment payments upon
a failure by the Company to pay, or termination of service in the context of a
change in control of the Company. After retirement or other termination of
services as a director, the Governance Committee determines whether fees
deferred under the Plan are to be paid in a lump sum or periodic installments
and whether the amounts converted to Company share units are to be paid in cash
or Company common shares. Under the Deferred Incentive Compensation Plan,
participants, including officers and other eligible executives, were able to
defer receipt of their annual incentive compensation award as either short-term
deferrals (5 years) or retirement compensation. Amounts deferred as retirement
compensation earn the greater of Company share price appreciation plus dividend
equivalents or 13-week U.S. Treasury bill returns until paid. This determination
is made at the time of each payment, whether made in lump sum or installments.
Short-term deferrals earn 13-week U.S. Treasury bill returns. Amounts deferred
as retirement compensation which are converted to Company share units are
payable in Company common shares, either in a lump sum or periodic installments,
as determined by the Company's Corporate Compensation Committee which is
comprised of Company officers. Participants were able to defer the full amount
of eligible cash compensation under these Plans. To the extent that cash
compensation is deferred pursuant to these Plans, or pursuant to the Incentive
Compensation Deferral Plan, the Company may be able to preserve the
deductibility of the compensation under Section 162(m) of the Internal Revenue
Code. However, in some circumstances cash compensation paid to executive
officers is not deductible by the Company.
(3) Includes an aggregate of 231,070 restricted shares, 2,865,800 of
performance-based stock options and 396,421 shares underlying stock units,
payable on a one-for-one basis, credited to stock unit accounts as of December
31, 2004 under the Incentive Compensation Deferral Plans.
(4) Represents shares underlying stock units, payable on a one-for-one basis,
credited to stock unit accounts as of December 31, 2004 under the 1996
Non-Employee Director Fee Deferral Plan and the Deferred Incentive Compensation
Plan.
(5) Weighted average exercise price of outstanding stock options; excludes
restricted stock and deferred compensation share units.
Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
None required to be reported.
Item 14. Principal Accountant Fees and Services
- -----------------------------------------------
Information required with respect to principal accountant fees and services is
set forth under the caption "Audit Committee Report" in the Company's
<PAGE>
definitive Proxy Statement to be filed on or about March 18, 2005, and is
incorporated by reference.
Part IV
Item 15. Exhibits and Financial Statement Schedules
- ---------------------------------------------------
(a) (1) The report of the independent registered public accounting firm,
consolidated financial statements and notes to consolidated financial
statements, included in Item 8 above, are filed as a separate section
of this Form 10-K:
Report of Independent Registered Public Accounting Firm - Page F-1
Statements of Consolidated Income - Years ended December 31, 2004,
2003 and 2002 - Page F-5
Consolidated Balance Sheets - December 31, 2004 and 2003 - Pages F-6
and F-7
Statements of Consolidated Cash Flows - Years ended December 31, 2004
2003 and 2002 - Page F-8
Statements of Consolidated Shareholders' Equity - Years ended December
31, 2004, 2003 and 2002 -Pages F-9 and F-10
Notes to Consolidated Financial Statements - Pages F-11 through F-39
(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 are inapplicable 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 10-K for
the year ended December 31, 2002
3(b) Amended Regulations (amended and restated as of April 26, 2000) -
Incorporated by reference to the 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) Rights Agreement (Dated as of June 28, 1995) - Incorporated by
reference to Registration Statement 333-74355 filed on March 12,
1999
10 Material contracts - Each of the following is either a management
contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated
as of March 31, 2000) - Incorporated by reference to the
Form 10-K for the year ended December 31, 2000
<PAGE>
(b) Executive Strategic Incentive Plan I (Amended and Restated
as of January 1, 2001) - Incorporated by reference to the
Form 10-K for the year ended December 31, 2002
(c) Group Replacement Insurance Plan (GRIP), effective as of
June 1, 1992 - Incorporated by reference to the Form 10-K
for the year ended December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference to the
Form 10-K for the year ended December 31, 2002
(e) 1995 Stock Plan - Incorporated by reference to the Form 10-K
for the year ended December 31, 2002
(f) Incentive Compensation Deferral Plan (amended and restated
as of October 1, 1997) - Incorporated by reference to the
Form 10-K for the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with
officers of Eaton Corporation - Incorporated by reference to
the Form 10-K for the year ended December 31, 2002
(h) Form of Indemnification Agreement entered into with officers
of Eaton Corporation - Incorporated by reference to the Form
10-K for the year ended December 31, 2002
(i) Limited Eaton Service Supplemental Retirement Income Plan
(amended and restated as of January 1, 2003) - Incorporated
by reference to the Form 10-K for the year ended December
31, 2002
(j) Supplemental Benefits Plan (amended and restated as of
January 1, 1989) (which provides supplemental retirement
benefits) - Incorporated by reference to the Form 10-K for
the year ended December 31, 2002
(k) Excess Benefits Plan (Amended and Restated Effective January
1, 1989) (with respect to Section 415 limitations of the
Internal Revenue Code) - Incorporated by reference to the
Form 10-K for the year ended December 31, 2002
(l) Executive Incentive Compensation Plan (Effective as of
January 1, 2003) - Incorporated by reference to the Form
10-K for the year ended December 31, 2003
(m) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1985 and amended effective as of September 24,
1996, January 28, 1998, January 23, 2002 and February 24,
2004) - Incorporated by reference to the Form 10-Q for the
three months ended March 31, 2004
(n) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1980 and amended and restated in 1989 and 1996) -
Incorporated by reference to the Form 10-K for the year
ended December 31, 2002
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and
restated as of October 22, 2002) - Incorporated by reference
to the Form 10-K for the year ended December 31, 2002
(p) Trust Agreement - Outside Directors (dated December 6, 1996)
- Incorporated by reference to the Form 10-K for the year
ended December 31, 2002
<PAGE>
(q) Trust Agreement - Officers and Employees (dated December 6,
1996) - Incorporated by reference to the Form 10-K for the
year ended December 31, 2002
(r) 1998 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of
January 1, 2001) - Incorporated by reference to the Form
10-K for the year ended December 31, 2002
(u) Vehicle Allowance Program (Effective as of January 1, 2003)
- Incorporated by reference to the Form 10-K for the year
ended December 31, 2003
(v) 2004 Stock Plan - Incorporated by reference to the
definitive Proxy Statement dated March 19, 2004
(w) 2005 Non-Employee Director Fee Deferral Plan (Effective
January 1, 2005) - Filed in conjunction with this Form 10-K
(x) Deferred Incentive Compensation Plan II (Effective January
1, 2005) - Filed in conjunction with this Form 10-K
(y) Incentive Compensation Deferral Plan II (Effective January
1, 2005) - Filed in conjunction with this Form 10-K
(z) Supplemental Benefits Plan II (Effective January 1, 2005) -
Filed in conjunction with this Form 10-K
(aa) Excess Benefits Plan II (Effective January 1, 2005) - Filed
in conjunction with this Form 10-K
(bb) Limited Eaton Service Supplemental Retirement Income Plan II
(Effective January 1, 2005) - Filed in conjunction with this
Form 10-K
(cc) Amendment to the Plan (originally adopted in 1985) for the
Deferred Payment of Directors' Fees (Effective January 1,
2005) - Filed in conjunction with this Form 10-K
(dd) Form of Stock Option Agreement for Non-Employee Directors -
Filed in conjunction with this Form 10-K
(ee) Form of Stock Option Agreement for Executives - Filed in
conjunction with this Form 10-K
(ff) Form of Restricted Share Award Agreement - Filed in
conjunction with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this
Form 10-K
14 Code of Ethics - Incorporated by reference to the definitive Proxy
Statement to be filed on or about March 18, 2005
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this
Form 10-K
23 Consent of Independent Registered Public Accounting Firm - Filed in
<PAGE>
conjunction with this Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
31.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302) - Filed in conjunction with this Form 10-K
31.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302) - Filed in conjunction with this Form 10-K
32.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906) - Filed in conjunction with this Form 10-K
32.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906) - Filed in conjunction with this Form 10-K
(b) Exhibits
Certain exhibits required by this portion of Item 15 are filed as a separate
section of this Form 10-K.
(c) Financial Statement Schedules
None required to be filed.
<PAGE>
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 10, 2005 /s/ Richard H. Fearon
------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning 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 10, 2005
<TABLE>
<CAPTION>
Signature Title
- --------- -----
<S> <C>
*
- -------------------
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
*
- -------------------
Gregory R. Page Director
*
- -------------------
Kiran M. Patel Director
*
- -------------------
Victor A. Pelson Director
*
- -------------------
Gary L. Tooker Director
</TABLE>
*By /s/ Richard H. Fearon
--------------------------------------
Richard H. Fearon, Attorney-in-Fact
for the officers and directors signing
in the capacities indicated
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors & Shareholders
Eaton Corporation
We have audited the accompanying consolidated balance sheets of Eaton
Corporation as of December 31, 2004 and 2003, and the related statements of
consolidated income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 2004. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Eaton Corporation
at December 31, 2004 and 2003, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December 31,
2004, in conformity with United States generally accepted accounting principles.
We also have audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Eaton
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
and our report dated February 11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
February 11, 2005
F-1
<PAGE>
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
- ----------------------------------------------------------------
The management of Eaton Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in
Exchange Act rules 13a-15(f)).
Under the supervision and with the participation of Eaton's management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of the Company's internal control
over financial reporting as of December 31, 2004. In conducting this evaluation,
we used the framework set forth by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based
on this evaluation under the framework referred to above, management concluded
that the Company's internal control over financial reporting was effective as of
December 31, 2004.
The independent registered public accounting firm Ernst & Young LLP has issued
an audit report on management's assessment of the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. This report
is included herein.
<TABLE>
<S> <C> <C>
/s/ Alexander M. Cutler /s/ Richard H. Fearon /s/ Billie K. Rawot
- ----------------------- ---------------------------- -------------------
Chairman and Chief Executive Vice President - Vice President and
Executive Officer; Chief Financial and Planning Controller
President Officer
</TABLE>
February 11, 2005
F-2
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------
To the Board of Directors & Shareholders
Eaton Corporation
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Eaton
Corporation maintained effective internal control over financial reporting as of
December 31, 2004, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Eaton Corporation's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Eaton Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also in our
opinion, Eaton Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Eaton Corporation as of December 31, 2004 and 2003, and the related statements
F-3
<PAGE>
of consolidated income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 2004 and our report dated February
11, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
February 11, 2005
F-4
<PAGE>
EATON CORPORATION
STATEMENTS OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Year ended December 31
------------------------
(Millions except for per share data) 2004 2003 2002
------ ------ ------
<S> <C> <C> <C>
Net sales $9,817 $8,061 $7,209
Cost of products sold 7,082 5,897 5,272
Selling & administrative expense 1,587 1,351 1,217
Research & development expense 261 223 203
Interest expense-net 78 87 104
Provision to exit a business 15
Gain on sale of business (18)
Other (income) expense-net 13 (5) 32
------ ------ ------
Income before income taxes 781 508 399
Income taxes 133 122 118
------ ------ ------
Net income $ 648 $ 386 $ 281
====== ====== ======
Net income per Common Share assuming dilution $ 4.13 $ 2.56 $ 1.96
Average number of Common Shares outstanding
assuming dilution 157.1 150.5 143.4
Net income per Common Share basic $ 4.24 $ 2.61 $ 1.99
Average number of Common Shares outstanding basic 153.1 147.9 141.2
Cash dividends paid per Common Share $ 1.08 $ .92 $ .88
</TABLE>
The notes on pages F-11 to F-39 are an integral part of the consolidated
financial statements.
F-5
<PAGE>
EATON CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------
(Millions of dollars) 2004 2003
------- -------
<S> <C> <C>
ASSETS
Current assets
- --------------
Cash $ 85 $ 61
Short-term investments 211 804
Accounts receivable 1,612 1,190
Inventories 966 721
Deferred income taxes 216 192
Other current assets 92 125
------- -------
3,182 3,093
------- -------
Property, plant & equipment
Land & buildings 959 897
Machinery & equipment 3,526 3,326
------- -------
4,485 4,223
Accumulated depreciation (2,338) (2,147)
------- -------
2,147 2,076
Goodwill 2,433 2,095
Other intangible assets 644 541
Deferred income taxes & other assets 669 418
------- -------
$ 9,075 $ 8,223
======= =======
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities
- -------------------
Short-term debt $ 13 $ 45
Current portion of long-term debt 26 257
Accounts payable 776 526
Accrued compensation 270 204
Accrued income & other taxes 283 298
Other current liabilities 894 796
------- -------
2,262 2,126
------- -------
Long-term debt 1,734 1,651
Postretirement benefits other than pensions 617 636
Pensions & other liabilities 856 693
Shareholders' equity
Common Shares (153.3 million outstanding
in 2004 and 153.0 million in 2003) 77 76
Capital in excess of par value 1,993 1,856
Retained earnings 2,112 1,816
Accumulated other comprehensive loss (538) (585)
Deferred compensation plans (38) (46)
------- -------
3,606 3,117
------- -------
$ 9,075 $ 8,223
======= =======
</TABLE>
F-6
<PAGE>
The notes on pages F-11 to F-39 are an integral part of the consolidated
financial statements.
F-7
<PAGE>
EATON CORPORATION
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------
(Millions) 2004 2003 2002
----- ----- -----
<S> <C> <C> <C>
Net cash provided by operating activities
- -----------------------------------------
Net income $ 648 $ 386 $ 281
Adjustments to reconcile to net cash
provided by operating activities
Depreciation & amortization 400 394 376
Deferred income taxes (133) (54) (51)
Pensions 94 34 (4)
Other long-term liabilities 12 27 (14)
Other non-cash items in income (1) 11 17
Changes in working capital, excluding
acquisitions & sales of businesses
Accounts receivable (218) (51) 59
Inventories (102) 79 13
Accounts payable 143 (41) 41
Accrued income & other taxes 46 35 101
Other current liabilities (122) 32 (14)
Other working capital accounts 76 (12) 47
Contribution to United States qualified
pension plans (75)
Other-net 70 34 48
----- ----- -----
838 874 900
----- ----- -----
Net cash used in investing activities
- -------------------------------------
Expenditures for property, plant & equipment (330) (273) (228)
Acquisitions of businesses, less cash acquired (627) (252) (153)
Sale of business 92
Sales (purchases) of short-term investments-net 606 (436) (135)
Other-net 18 (8) 9
----- ----- -----
(333) (969) (415)
----- ----- -----
Net cash (used in) provided by financing activities
- ---------------------------------------------------
Borrowings with original maturities
of more than three months
Proceeds 75 419
Payments (248) (155) (635)
Borrowings with original maturities
of less than three months-net (33) (39) (228)
Cash dividends paid (163) (134) (123)
Proceeds from exercise of employee stock options 138 113 45
(Purchase) sale of Common Shares (250) 296
----- ----- -----
(481) 81 (522)
----- ----- -----
Total increase (decrease) in cash 24 (14) (37)
Cash at beginning of year 61 75 112
----- ----- -----
Cash at end of year $ 85 $ 61 $ 75
===== ===== =====
</TABLE>
The notes on pages F-11 to F-39 are an integral part of the consolidated
financial statements.
F-8
<PAGE>
EATON CORPORATION
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated Total
Common Shares Capital in other Deferred Share-
---------------- excess of Retained comprehensive compensa- holders'
(Millions) Shares Dollars par value earnings loss tion plans equity
------ ------- ---------- -------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2002 139.0 $ 70 $1,348 $1,412 $(299) $(56) $2,475
Net income 281 281
Other comprehensive loss (400) (400)
------
Total comprehensive loss (119)
Cash dividends paid (123) (123)
Issuance of shares under
employee benefit plans,
including tax benefit 2.0 (a) 61 (2) 8 67
Issuance of shares to trust .2 5 (5) 0
Other-net (1) 3 2
----- ---- ------ ------ ----- ---- ------
Balance at December 31, 2002 141.2 70 1,413 1,568 (699) (50) 2,302
Net income 386 386
Other comprehensive income 114 114
------
Total comprehensive income 500
Cash dividends paid (134) (134)
Issuance of shares under
employee benefit plans,
including tax benefit 4.2 2 141 (2) 5 146
Issuance of shares to trust .1 3 (3) 0
Sale of shares 7.4 4 294 (2) 296
Other-net .1 5 2 7
----- ---- ------ ------ ----- ---- ------
Balance at December 31, 2003 153.0 76 1,856 1,816 (585) (46) 3,117
Net income 648 648
Other comprehensive income 47 47
------
Total comprehensive income 695
Cash dividends paid (163) (163)
Issuance of shares under
employee benefit plans,
</TABLE>
F-9
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
including tax benefit 4.5 3 188 (2) 10 199
Issuance of shares to trust 2 (2) 0
Purchase of shares (4.2) (2) (53) (195) (250)
Other-net 8 8
----- ---- ------ ------ ----- ---- ------
Balance at December 31, 2004 153.3 $ 77 $1,993 $2,112 $(538) $(38) $3,606
===== ==== ====== ====== ===== ==== ======
</TABLE>
(a) Balance less than $1.
The notes on pages F-11 to F-39 are an integral part of the consolidated
financial statements.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
Dollars in millions, except per share data (per share data assume dilution)
ACCOUNTING POLICIES
- -------------------
Consolidation & Basis of Presentation
- -------------------------------------
The consolidated financial statements include accounts of Eaton and all
subsidiaries and other controlled entities. The equity method of accounting is
used for investments in associate companies where the Company has a 20% to 50%
ownership interest. These associate companies are not material either
individually, or in the aggregate, to Eaton's financial position, results of
operations or cash flows.
Eaton does not have off-balance sheet arrangements or financings with
unconsolidated entities or other persons. In the ordinary course of business,
the Company leases certain real properties and equipment, as described in "Lease
Commitments" below. Transactions with related parties are in the ordinary course
of business, are conducted on an arm's-length basis, and are not material to
Eaton's financial position, results of operations or cash flows.
Foreign Currency Translation
- ----------------------------
The functional currency for substantially 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 Accumulated other
comprehensive income (loss) in Shareholders' equity.
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.
In November 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 151, "Inventory Costs".
SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43, Chapter
4, "Inventory Pricing", to clarify the accounting for abnormal amounts of idle
facility expense, freight, handling costs, and wasted material (spoilage). SFAS
No. 151 will be effective for Eaton in 2006 and is expected to have an
immaterial effect on Eaton's financial position, results of operations and cash
flows.
Depreciation & Amortization
- ---------------------------
Depreciation and amortization are computed by the straight-line method for
financial statement purposes. Cost of buildings is depreciated over 40 years and
machinery and equipment over principally three to 10 years. Intangible assets
subject to amortization, primarily consisting of patents, tradenames
F-11
<PAGE>
and distribution networks, are amortized over a range of five to 30 years.
Software is amortized over a range of three to five years.
Long-lived assets, except goodwill and indefinite life intangible assets as
described below, 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, a significant change in the use of an asset, or the
planned disposal or sale of the 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.
Goodwill & Indefinite Life Intangible Assets
- --------------------------------------------
In accordance with Statement of Financial Accounting Standards (SFAS) No. 142,
"Goodwill and Other Intangible Assets", Eaton does not amortize goodwill and
indefinite life intangible assets recorded in connection with current and
previous business acquisitions. Indefinite life intangible assets primarily
consist of trademarks. The Company completed the annual impairment tests for
goodwill and indefinite life intangible assets required by SFAS No. 142. These
tests confirmed that the fair value of the Company's reporting units and
indefinite life intangible assets exceed their respective carrying values and
that no impairment loss was required to be recognized.
Financial Instruments
- ---------------------
In the normal course of business, Eaton is exposed to fluctuations in interest
rates, foreign currency exchange rates, and commodity prices. The Company uses
various financial instruments, primarily foreign currency forward exchange
contracts, foreign currency swaps, interest rate swaps and commodity futures
contracts, to manage exposure to price fluctuations.
Financial instruments used by Eaton are straightforward, non-leveraged
instruments for which quoted market prices are readily available from a number
of independent sources. Such financial instruments are not bought and sold
solely for trading purposes, except for nominal amounts authorized under
limited, controlled circumstances. No financial instruments were purchased or
sold for trading purposes in 2004. Such transactions resulted in an immaterial
net loss in 2003 and an immaterial net gain in 2002. The risk of credit loss is
deemed to be remote, because the counterparties to these instruments are major
international financial institutions with strong credit ratings and because of
the Company's control over the size of positions entered into with any one
counterparty.
All derivative financial instruments are recognized as either assets or
liabilities on the balance sheet and are measured at fair value. Accounting for
the gain or loss resulting from the change in the financial instrument's fair
value depends on whether it has been designated, and is effective, as a hedge
and, if so, on the nature of the hedging activity. Financial instruments can be
designated as hedges of changes in the fair value of a recognized fixed-rate
asset or liability, or the firm commitment to acquire such an asset or
liability; as hedges of variable cash flows of a recognized variable-rate asset
or liability; or the forecasted acquisition of such an asset or liability; or as
hedges of foreign currency exposure from a net investment in one of the
Company's foreign operations. Gains and losses related to a hedge are either
F-12
<PAGE>
recognized in income immediately to offset the gain or loss on the hedged item;
or deferred and reported as a component of Other comprehensive income (loss) in
Shareholders' equity and subsequently recognized in net income when the hedged
item affects net income. The ineffective portion of the change in fair value of
a financial instrument is recognized in income immediately.
The gain or loss related to financial instruments that are not designated as
hedges are recognized immediately in net income.
Warranty Expenses
- -----------------
Estimated product warranty expenses are accrued in Cost of products sold at the
time the related sale is recognized. Estimates of warranty expenses are based
primarily on historical warranty claim experience and specific customer
contracts. Warranty expenses include accruals for basic warranties for products
sold, as well as accruals for product recalls and other related events when they
are known and estimable.
Stock Options Granted to Employees & Directors
- ----------------------------------------------
Stock options granted to employees and directors to purchase Common Shares are
accounted for using the intrinsic-value-based method. 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 shares.
In 2002, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure". SFAS No. 148 amended SFAS No. 123,
"Accounting for Stock-Based Compensation", to provide alternative methods of
transition when a company voluntarily changes from the intrinsic-value-method to
the fair-value-based method of recognizing expense in the income statement for
stock-based employee compensation, including stock options granted to employees
and directors. As allowed by SFAS No. 123, Eaton had adopted the Statement's
disclosure-only provisions and did not recognize expense for stock options
granted to employees and directors. If the Company accounted for stock options
under the fair-value-based method of expense recognition in SFAS No. 123, net
income per Common Share assuming dilution would have been reduced by $.08 in
2004, $.08 in 2003 and $.10 in 2002, as described further in "Shareholders'
Equity" below.
In December 2004, Statement of Financial Accounting Standards (SFAS) No. 123(R),
"Share-Based Payment" was issued by the Financial Accounting Standards Board.
SFAS No. 123(R) eliminates the alternative to use the intrinsic-value-method of
accounting that was provided in SFAS No. 123 as originally issued. SFAS No.
123(R) requires entities to recognize the cost of employee and director services
received in exchange for stock options based on the grant date fair value of
those awards, with limited exceptions. That cost will be recognized over the
period during which an employee or director is required to provide service in
exchange for the award. As required by SFAS No. 123(R), Eaton will begin to
recognize costs related to stock options in third quarter 2005. The Company
estimates that the adoption of SFAS No. 123(R) will reduce net income per Common
Share assuming dilution in the second half of 2005 by $.06.
F-13
<PAGE>
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped to
unaffiliated customers and title has transferred. Shipping and handling costs
billed to customers are included in Net sales and the related costs in Cost of
products sold. Other revenues for service contracts are recognized as the
services are provided.
Estimates
- ---------
Preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
ACQUISITIONS OF BUSINESSES
- --------------------------
Eaton acquired businesses and formed joint ventures for a combined net cash
purchase price of $627 in 2004, $252 in 2003 and $153 in 2002. The Statements of
Consolidated Income include the results of these businesses from the effective
dates of acquisition or formation.
On June 9, 2004, Eaton acquired Powerware Corporation, the power systems
business of Invensys plc, for $560 of cash, less cash acquired of $27.
Powerware, based in Raleigh, North Carolina, is a global leader in
Uninterruptible Power Systems (UPS), DC Power products and power quality
services. Powerware had revenues of $775 for the year ended March 31, 2004.
Powerware has operations in the United States, Canada, Europe, South America and
Asia/Pacific that provide products and services utilized by computer
manufacturers, industrial companies, governments, telecommunications firms,
medical institutions, data centers and other businesses. The acquisition of
Powerware is providing new products and solutions, along with strong brand
recognition and expanded channels, for Eaton's global electrical business. This
business is included in the Electrical segment.
Powerware's assets and liabilities were recorded at estimated fair values as
determined by Eaton's management based on information currently available and on
current assumptions as to future operations. The Company is in the process of
completing its purchase price allocation, including the finalization of
valuations of certain intangible assets and deferred tax assets and liabilities.
The allocation of the purchase price for this acquisition is preliminary and
will be finalized by the end of second quarter 2005. The preliminary allocation
is summarized below:
<TABLE>
<S> <C>
Current assets $306
Property, plant & equipment 44
Goodwill 313
Other intangible assets 95
Other assets 47
----
</TABLE>
F-14
<PAGE>
<TABLE>
<S> <C>
Total assets acquired 805
----
Current liabilities 263
Other liabilities 9
----
Total liabilities assumed 272
----
Net assets acquired $533
====
</TABLE>
Other intangible assets of $95 acquired as part of Powerware included $24
related to trademarks that are not subject to amortization. The remaining $71
was assigned to patents and other intangible assets that have a weighted-average
useful life of nine years. Goodwill of $313 relates to the Electrical segment,
substantially all of which is non-deductible for income tax purposes.
Unaudited pro forma results of operations for 2004 and 2003, as if Eaton and
Powerware had been combined as of the beginning of those periods, follow. The
pro forma results include preliminary estimates and assumptions, which Eaton's
management believes are reasonable. However, the pro forma results do not
include any cost savings or other effects of the planned integration of
Powerware, and, accordingly, are not necessarily indicative of the results which
would have occurred if the business combination had been in effect on the dates
indicated.
<TABLE>
<CAPTION>
Pro Forma Results of Operations
-------------------------------
2004 2003
------- ------
<S> <C> <C>
Net sales $10,153 $8,824
Net income 636 396
Net income per Common Share
Assuming dilution $ 4.05 $ 2.62
Basic 4.16 2.67
</TABLE>
On September 1, 2004, Eaton acquired Walterscheid Rohrverbindungstechnik GmbH
(Walterscheid) from GKN plc for $48 of cash. Walterscheid, a manufacturer of
hydraulic tube connectors and fittings primarily for the European market, had
2003 sales of $52 and is located in Lohmar, Germany. The allocation of the
purchase price for this acquisition is preliminary and will be finalized by the
end of third quarter 2005. This business is included in the Fluid Power segment.
In September 2004, Eaton contributed $28 of cash to purchase a 50% interest in a
new medium-duty truck transmission joint venture located in Changchun, China.
The partner in this venture is FAW Jiefang Automotive Co., Ltd., which is the
commercial vehicle subsidiary of China First Auto Works Group Company (FAW), the
largest manufacturer of commercial vehicles in China. Beginning in September
2004, Eaton's operating results include this joint venture, which is accounted
for under the equity method. Sales of this venture were not material in 2004.
This business is included in the Truck segment.
On January 31, 2003, the electrical division of Delta plc was acquired for
approximately $215 of cash. This business has operations in Europe and in the
F-15
<PAGE>
Asia/Pacific region and had sales of $326 in 2002. This business is included in
the Electrical segment.
In November 2002, the Boston Weatherhead business of Dana Corporation was
purchased for $130 of cash. This business, which had sales of $211 in 2002,
manufactures hose, tubing, and fluid connectors for fluid power systems. This
business is included in the Fluid Power segment.
EXIT & SALE OF BUSINESSES
- -------------------------
In December 2004, Eaton announced that it would exit its legacy tire and
refrigeration valve manufacturing business within the next year. The Company
incurred charges of $15 ($10 after-tax, or $.06 per Common Share) principally
for the write-down of fixed assets and workforce reductions. This business is in
the Automotive segment. In the Statements of Consolidated Income and Business
Segment Information, these charges were reported as a separate line item.
In July 2002, the Navy Controls business was sold for $92 resulting in a pretax
gain of $18 ($13 after-tax, or $.09 per Common Share). The net gain on the sale
of this business was reported as a separate line item in the Statements of
Consolidated Income and Business Segment Information.
RESTRUCTURING CHARGES
- ---------------------
2004 Charges
- ------------
In 2004, Eaton incurred restructuring charges related to the integration of:
Powerware, the electrical power systems business acquired in June 2004; the
electrical division of Delta plc, acquired in January 2003; and the Boston
Weatherhead fluid power business, acquired in November 2002. In accordance with
generally accepted accounting principles, these charges were recorded as
restructuring expense as incurred.
Restructuring charges in the Fluid Power segment consisted of $8 for plant
consolidations and other expenses.
Restructuring charges in the Electrical segment consisted of $32 for plant
consolidations and other expenses, and $1 of workforce reductions. The charges
primarily related to downsizing plants in Chadderton, United Kingdom, Neuss,
Germany and Necedah, Wisconsin, along with other integration actions.
2003 Charges
- ------------
In 2003, Eaton incurred restructuring charges related to the electrical division
of Delta plc acquired in January 2003 and the Boston Weatherhead fluid power
business acquired in November 2002. In accordance with generally accepted
accounting principles, these charges were recorded as restructuring expense as
incurred.
Restructuring charges in the Fluid Power segment consisted of $13 for plant
consolidations and other expenses, and $1 for workforce reductions of 82
employees. The charges primarily related to the closure of facilities in Norwood
and Mooresville, North Carolina.
F-16
<PAGE>
Restructuring charges in the Electrical segment consisted of $20 for plant
consolidations, primarily the Ottery St. Mary, United Kingdom plant, and other
expenses, and $2 of workforce reductions for 145 employees.
2002 Charges
- ------------
In 2002, Eaton incurred restructuring charges to reduce operating costs across
its business segments and certain corporate functions. The charges in 2002 were
primarily a continuation of restructuring programs initiated in 2001.
Additional restructuring charges related to past acquisitions were incurred in
Fluid Power. The charges consisted of $22 of workforce reductions for 841
employees and $4 of asset write-downs, plant consolidation and other
expenses. The charges primarily related to the closure of facilities in
Glenrothes, Scotland and Livorno, Italy, and for the closure of the Mooresville,
North Carolina facility, which was announced in third quarter 2002 and was
completed in first quarter 2003.
Restructuring charges in the Electrical segment consisted primarily of $13 of
workforce reductions for 449 employees and $3 for asset write-downs, plant
consolidation and other expenses.
Restructuring charges in the Truck segment consisted of $6 for workforce
reductions of 251 employees and $10 for asset write-downs, plant consolidation
and other expenses. The charges primarily related to the closure of the
heavy-duty transmission plant in Shelbyville, Tennessee due to depressed
conditions in the truck industry during 2002 and 2001 and Eaton's efforts to
rationalize manufacturing capacity to better manage the cyclical nature of the
truck industry.
Restructuring charges related to corporate staff consisted of $3 of workforce
reductions for 133 employees.
Summary of Restructuring Charges
- --------------------------------
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Fluid Power $ 8 $ 14 $ 26
Electrical 33 22 16
Automotive 1
Truck 16
---- ---- ----
41 36 59
Corporate restructuring charges 1 3
---- ---- ----
Pretax charges $ 41 $ 37 $ 62
==== ==== ====
After-tax charges $ 27 $ 24 $ 41
Per Common Share $.17 $.16 $.29
</TABLE>
The restructuring charges were included in the Statements of Consolidated Income
in Cost of products sold or Selling & administrative expense, as appropriate. In
Business Segment Information, the restructuring charges reduced Operating profit
F-17
<PAGE>
of the related business segment or were included in Other corporate expense-net,
as appropriate.
A comparison of restructuring charges and utilization of the various components
for 2004, 2003 and 2002 follows:
<TABLE>
<CAPTION>
Workforce reductions Plant
-------------------- consolidation
Employees Dollars & other Total
--------- ------- ------------- -----
<S> <C> <C> <C> <C>
Balance remaining at
January 1, 2002 344 $ 21 $ 2 $ 23
2002 charges 1,994 45 17 62
Utilized in 2002 (1,844) (55) (14) (69)
------ ---- ---- ----
Balance remaining at
December 31, 2002 494 11 5 16
2003 charges 227 3 34 37
Utilized in 2003 (700) (12) (31) (43)
------ ---- ---- ----
Balance remaining at
December 31, 2003 21 2 8 10
2004 charges 10 1 40 41
Utilized in 2004 (31) (3) (45) (48)
------ ---- ---- ----
Balance remaining at
December 31, 2004 0 $ 0 $ 3 $ 3
====== ==== ==== ====
</TABLE>
CONTRIBUTION TO EATON CHARITABLE FUND
- -------------------------------------
In 2004, a charge of $13 was recorded for a contribution to the Eaton Charitable
Fund ($8 after-tax, or $.05 per Common Share). In 2002, a similar contribution
of $10 was recorded ($6 after-tax, or $.04 per share). In the Statements of
Consolidated Income, the charges were included in Other (income) expense-net. In
Business Segment Information, the charges were included in Other corporate
expense-net.
OTHER INTANGIBLE ASSETS
- -----------------------
A summary of other intangible assets follows:
<TABLE>
<CAPTION>
2004 2003
------------------------- -------------------------
Historical Accumulated Historical Accumulated
cost amortization cost amortization
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Intangible assets not
subject to amortization
(primarily trademarks) $404 $ 24 $373 $ 24
==== ==== ==== ====
</TABLE>
F-18
<PAGE>
Intangible assets subject
to amortization
Patents $198 $ 80 $205 $ 96
Other 194 48 135 52
---- ---- ---- ----
$392 $128 $340 $148
==== ==== ==== ====
Expense related to intangible assets subject to amortization for 2004 was $25.
Estimated annual pretax expense for intangible assets subject to amortization
for each of the next five years is $28 in 2005, $27 in 2006, $27 in 2007, $26 in
2008, and $25 in 2009.
DEBT & OTHER FINANCIAL INSTRUMENTS
- ----------------------------------
Short-term debt of $13 at December 31, 2004 related to lines of credit of
subsidiaries outside the United States, primarily in Brazil, and was largely
denominated in foreign currencies. The weighted-average interest rate on
short-term debt was 15.7% at December 31, 2004, which includes the effect of $10
of debt in Brazil with an interest rate of 18.2%, and 6.3% at December 31, 2003.
These subsidiaries have available short-term lines of credit aggregating $212
from various banks worldwide.
A summary of long-term debt, including the current portion, follows:
<TABLE>
<CAPTION>
2004 2003
---- ----
<S> <C> <C>
6.95% notes due 2004 $250
1.62% Yen notes due 2006 $ 49 47
8% debentures due 2006
($25 converted to floating rate by
interest rate swap) 86 86
8.90% debentures due 2006
(converted to floating rate by
interest rate swap) 100 100
6% Euro 200 million notes due 2007
(converted to floating rate by
interest rate swap) 273 252
7.37% notes due 2007
($20 converted to floating rate by
interest rate swap) 21 21
7.14% notes due 2007 3 3
6.75% notes due 2007
(converted to floating rate by
interest rate swap) 25 25
7.40% notes due 2009
($15 converted to floating rate by
interest rate swap) 16 16
5.75% notes due 2012
($225 converted to floating rate by
interest rate swap) 300 300
7.58% notes due 2012
($12 converted to floating rate by
interest rate swap) 13 13
5.80% notes due 2013 7 7
7.09% notes due 2018
</TABLE>
F-19
<PAGE>
<TABLE>
<S> <C> <C>
($25 converted to floating rate by
interest rate swap) 26 26
8-7/8% debentures due 2019 38 38
8.10% debentures due 2022
($50 converted to floating rate by
interest rate swap) 100 100
7-5/8% debentures due 2024
($55 converted to floating rate by
interest rate swap) 66 66
6-1/2% debentures due 2025
(due 2005 at option of debenture holders) 145 145
7-7/8% debentures due 2026 81 81
7.65% debentures due 2029
($75 converted to floating rate by
interest rate swap) 200 200
5.45% debentures due 2034
(converted to floating rate by
interest rate swap) 75
Other 136 132
------ ------
Total long-term debt 1,760 1,908
Less current portion of long-term debt (26) (257)
------ ------
Long-term debt less current portion $1,734 $1,651
====== ======
</TABLE>
On January 28, 2005, Eaton issued $75 of 5.45% Senior Debentures which mature in
2034. These Debentures were converted to a floating interest rate of 3.1% by an
interest rate swap. This transaction brings the total amount of outstanding
5.45% Senior Debentures due in 2034 to $150 and will form a single series with
the $75 of 5.45% Senior Debentures due in 2034 issued on October 21, 2004. The
Company used the proceeds for general corporate purposes.
Eaton has long-term credit facilities of $700, of which $400 expire in April
2005 and $300 expire in May 2008.
Aggregate mandatory annual maturities of long-term debt for each of the next
five years are $26 in 2005, $241 in 2006, $327 in 2007, $2 in 2008, and $17 in
2009. Interest paid was $96 in 2004, $105 in 2003, and $116 in 2002.
Eaton has entered into interest rate swaps to manage interest rate risk. A
summary of these instruments outstanding at December 31, 2004, excluding certain
immaterial instruments, follows (currency in millions):
<TABLE>
<CAPTION>
Interest rates(b)
Interest Hedge Notional ----------------- Floating interest
rate swaps (a) type amount Receive Pay rate basis
- -------------- ----- -------- ------- ---- ------------------
<S> <C> <C> <C> <C> <C>
Fixed to floating Fair value $ 25 8.0% 6.53% 6 month LIBOR+4.61%
Fixed to floating Fair value $ 100 8.9% 5.81% 6 month LIBOR+3.89%
Fixed to floating Fair value Euro 200 6.0% 2.75% 6 month LIBOR+0.54%
Fixed to floating Fair value $ 20 7.37% 6.78% 6 month LIBOR+4.47%
Fixed to floating Fair value $ 25 6.75% 3.82% 6 month LIBOR+1.50%
Fixed to floating Fair value $ 15 7.40% 4.27% 6 month LIBOR+1.95%
</TABLE>
F-20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Fixed to floating Fair value $225 5.75% 2.48% 6 month LIBOR+0.78%
Fixed to floating Fair value $ 12 7.58% 4.08% 6 month LIBOR+1.76%
Fixed to floating Fair value $ 25 7.09% 4.72% 6 month LIBOR+2.40%
Fixed to floating Fair value $ 50 8.10% 4.36% 6 month LIBOR+2.44%
Fixed to floating Fair value $ 55 7.63% 4.36% 6 month LIBOR+2.16%
Fixed to floating Fair value $ 75 7.65% 4.72% 6 month LIBOR+2.36%
Fixed to floating Fair value $ 75 5.45% 2.47% 6 month LIBOR+0.28%
</TABLE>
(a) The maturity of the swaps correspond with the maturity of the hedged item
as noted in the long-term debt table.
(b) Interest rates are as of December 31, 2004.
The carrying values of cash, short-term investments and short-term debt in the
balance sheet approximate their estimated fair values. The estimated fair values
of other financial instruments outstanding follow:
<TABLE>
<CAPTION>
2004 2003
----------------------------- -----------------------------
Notional Carrying Fair Notional Carrying Fair
amount value value amount value value
-------- -------- ------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt &
current portion of
long-term debt(a) $(1,760) $(1,975) $(1,908) $(2,132)
Foreign currency
principal swaps $ 72 (8) (8) $ 13 (4) (4)
Foreign currency
forward exchange
contracts 151 (5) (5) 288 3 3
Interest rate swaps
Fixed to floating 975 50 50 1,154 42 42
</TABLE>
(a) Includes foreign currency denominated debt.
The estimated fair values of financial instruments were principally based on
quoted market prices where such prices are available, and where unavailable,
fair values were estimated based on comparable contracts, utilizing information
obtained from established, independent providers. The fair value of foreign
currency forward exchange contracts, which are primarily related to the Euro,
Japanese Yen and Swiss Franc, and foreign currency principal and interest rate
swaps which mature during 2005 through 2007 were estimated based on quoted
market prices of comparable contracts, adjusted through interpolation where
necessary for maturity differences.
RETIREMENT BENEFIT PLANS
- ------------------------
Eaton has defined benefit pension plans and other postretirement benefit plans.
Components of plan obligations and assets, and Eaton's recorded assets
(liabilities), follow:
F-21
<PAGE>
<TABLE>
<CAPTION>
Other
postretirement
Pension benefits benefits
----------------- --------------
2004 2003 2004 2003
------- ------- ----- -----
<S> <C> <C> <C> <C>
Changes in projected benefit obligation
- ---------------------------------------
Benefit obligation at beginning of year $(2,304) $(1,996) $(937) $(878)
Service cost (103) (96) (17) (15)
Interest cost (134) (129) (53) (56)
Actuarial loss (165) (119) (5) (73)
Benefits paid 188 192 99 97
Plan amendments (7) (10) 18 (10)
Foreign currency translation (55) (76)
Business acquisitions (14) (66) (2)
Other (7) (4) (1)
------- ------- ----- -----
Benefit obligation at end of year (2,601) (2,304) (896) (937)
------- ------- ----- -----
Change in plan assets
- ---------------------
Fair value of plan assets
at beginning of year 1,670 1,480
Actual return on plan assets 194 234
Employer contributions 134 48 99 97
Benefits paid (188) (192) (99) (97)
Foreign currency translation 34 47
Business acquisitions 2 48
Other 6 5
------- ------- ----- -----
Fair value of plan assets at end of year 1,852 1,670 0 0
------- ------- ----- -----
Benefit obligation in excess of plan assets (749) (634) (896) (937)
Unrecognized net actuarial loss 1,005 894 247 250
Unrecognized prior service cost 26 21 (5) 13
Other 2 11 8 9
------- ------- ----- -----
Net amount recognized $ 284 $ 292 $(646) $(665)
======= ======= ===== =====
</TABLE>
Amounts recognized in the balance sheet consist of:
<TABLE>
<CAPTION>
Other
postretirement
Pension benefits benefits
---------------- --------------
2004 2003 2004 2003
----- ----- ----- -----
<S> <C> <C> <C> <C>
Prepaid asset $ 29 $ 28
Accrued liability (488) (402) $(646) $(665)
Intangible asset 26 22
Accumulated other comprehensive loss 717 644
----- ----- ----- -----
Net amount recognized $ 284 $ 292 $(646) $(665)
===== ===== ===== =====
</TABLE>
F-22
<PAGE>
Statement of Financial Accounting Standards No. 87 requires recognition of a
minimum liability for those pension plans with accumulated benefit obligations
in excess of the fair values of plan assets at the end of the year. Accordingly,
in the fourth quarters of 2004, 2003 and 2002, Eaton recorded non-cash charges
of $73, $27 and $586, respectively, ($48, $17 and $386 after-tax, respectively)
related to the additional minimum liability for certain underfunded pension
plans, which increased Accumulated other comprehensive loss in Shareholders'
equity. Pension funding requirements are not affected by the recording of these
charges. These charges did not impact net income and will reverse should the
fair value of the pension plans' assets exceed the accumulated benefit
obligation.
The total accumulated benefit obligation for all pension plans at December 31,
2004 was $2,329 and at year-end 2003 was $2,052. Pension plans with an
accumulated benefit obligation in excess of plan assets at December 31 follow:
<TABLE>
<CAPTION>
2004 2003
------ ------
<S> <C> <C>
Projected benefit obligation $2,523 $2,242
Accumulated benefit obligation 2,260 1,996
Fair value of plan assets 1,773 1,600
</TABLE>
The measurement date for all pension and other postretirement benefit plans is
November 30. Assumptions used to determine pension benefit obligations at
year-end follow:
<TABLE>
<CAPTION>
United States &
non-United States
United States plans
plans (weighted-average)
------------- ------------------
2004 2003 2004 2003
---- ---- ---- ----
<S> <C> <C> <C> <C>
Discount rate 6.00% 6.25% 5.81% 6.11%
Rate of compensation increase 3.50% 3.50% 3.60% 3.60%
</TABLE>
United States pension plans represent 69% and 72% of the benefit obligation in
2004 and 2003, respectively.
The components of pension benefit cost follow:
<TABLE>
<CAPTION>
2004 2003 2002
----- ----- -----
<S> <C> <C> <C>
Service cost $(103) $ (96) $ (76)
Interest cost (134) (129) (126)
Expected return on plan assets 179 181 213
Other (26) (7) (8)
----- ----- -----
(84) (51) 3
Curtailment loss (2) (1) (4)
Settlement loss (31) (34) (21)
----- ----- -----
$(117) $ (86) $ (22)
===== ===== =====
</TABLE>
F-23
<PAGE>
Assumptions used to determine net periodic pension cost for the years ended
December 31 follow:
<TABLE>
<CAPTION>
United States &
non-United States
United States plans
plans (weighted-average)
------------------- ------------------
2004 2003 2002 2004 2003 2002
---- ---- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Discount rate 6.25% 6.75% 7.25% 6.11% 6.53% 6.56%
Expected long-term
return on plan assets 8.75% 8.75% 10.00% 8.50% 8.71% 9.85%
Rate of compensation
increase 3.50% 3.75% 4.00% 3.60% 3.73% 3.74%
</TABLE>
The expected long-term rate of return on pension plan assets was determined
separately for each country and reflects long-term historical data, with greater
weight given to recent years, and takes into account each plan's target asset
allocation.
The weighted-average pension plan asset allocations by asset category at
December 31, 2004 and 2003 are as follows:
<TABLE>
<CAPTION>
2004 2003
---- ----
<S> <C> <C>
Equity securities 80% 81%
Debt securities 19 18
Other 1 1
--- ---
100% 100%
=== ===
</TABLE>
Investment policies and strategies are developed on a country specific basis.
The United States plan represents 72% of worldwide pension assets and its target
allocation is 85% diversified equity, 12% United States Treasury
Inflation-Indexed Securities, and 3% cash equivalents. The United Kingdom plan
represents 22% of worldwide pension assets and its target allocation is 70%
diversified equity securities and 30% United Kingdom Government Bonds.
In 2004, Eaton made voluntary contributions to pension plans of $75 in the
United States and $18 in the United Kingdom, as well as other contributions of
$41. In 2005, Eaton expects to make voluntary contributions to pension plans of
$50 in the United States, which was announced in January 2005, and $14 in the
United Kingdom, as well as other contributions of $31.
At December 31, 2004, expected pension benefit payments for each of the next
five years and the five years thereafter in aggregate are $158 in 2005, $169 in
2006, $176 in 2007, $183 in 2008, $193 in 2009, and $1,130 in 2010-2014.
F-24
<PAGE>
The components of other postretirement benefit cost follow:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Service cost $(17) $(15) $(15)
Interest cost (53) (56) (60)
Other (9) (9) (4)
---- ---- ----
(79) (80) (79)
Curtailment loss (1)
Settlement loss (2)
---- ---- ----
$(80) $(80) $(81)
==== ==== ====
</TABLE>
Assumptions used to determine other postretirement benefit obligations and cost
follow:
<TABLE>
<CAPTION>
2004 2003 2002
----- ----- -----
<S> <C> <C> <C>
Assumptions used to determine benefit
obligation at year-end
- -------------------------------------
Discount rate 6.00% 6.25% 6.75%
Health care cost trend rate
assumed for next year 10.00% 9.00% 10.00%
Ultimate health care cost trend rate 5.00% 5.00% 5.00%
Year ultimate health care cost trend
rate is achieved 2014 2007 2007
Assumptions used to determine cost
- ----------------------------------
Discount rate 6.25% 6.75% 7.25%
Initial health care cost trend rate 9.00% 10.00% 8.00%
Ultimate health care cost trend rate 5.00% 5.00% 5.00%
Year ultimate health care cost trend
rate is achieved 2007 2007 2007
</TABLE>
Assumed health care cost trend rates may have a significant effect on the
amounts reported for the health care plans. A 1-percentage point change in the
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1% Increase 1% Decrease
----------- -----------
<S> <C> <C>
Effect on total of service
and interest cost $ 1 $ (1)
Effect on other postretirement
benefit obligation 23 (21)
</TABLE>
The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the
Act) was passed on December 8, 2003. The Act provides for prescription drug
benefits under Medicare Part D and contains a subsidy to plan sponsors who
provide "actuarially equivalent" prescription plans. Eaton recognized the effect
of the Act in 2004. The accumulated postretirement benefit obligation decreased
by $51, with an offsetting change in unrecognized net actuarial loss. The
reduction was attributable to the Federal subsidy and an expected reduction
F-25
<PAGE>
in the number of retirees electing coverage under the Company's other
postretirement benefit plans. The Act also reduced net periodic other
postretirement benefit costs by $6 in 2004. Eaton has certain plans that are
non-contributory and that the Company believes satisfy the "actuarially
equivalent" test and will receive the subsidy. The reduction in the accumulated
postretirement benefit obligation and ongoing net periodic cost did not require
a modification or amendment of the Company's benefit plans. However, if certain
plans were amended, the Act could further reduce both the accumulated
postretirement benefit obligation and ongoing net periodic cost.
At December 31, 2004, expected other postretirement benefit payments for each of
the next five years and the five years thereafter in aggregate are $96 in 2005,
$100 in 2006, $102 in 2007, $101 in 2008, $101 in 2009, and $482 in 2010-2014.
The expected subsidy receipts related to the Act that are included in the other
postretirement benefit payments listed above for each of the next five years and
the five years thereafter in aggregate are $0 in 2005, $3 in each of 2006
through 2009, and $13 in 2010-2014.
The Company also has various defined-contribution benefit plans, primarily
consisting of the Eaton Savings Plan in the United States. Total contributions
related to these plans charged to expense were $44 in 2004, $40 in 2003, and $38
in 2002.
PROTECTION OF THE ENVIRONMENT
- -----------------------------
Eaton 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 required
to be certified to 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, Eaton is involved in remedial response and
voluntary environmental remediation at a number of sites, including certain of
its 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.
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, Eaton has estimated (without
discounting) the 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, 2004 and 2003, the balance sheet included a liability for these costs of $69
and $65, respectively.
Based upon Eaton's analysis and subject to the difficulty in estimating these
future costs, the Company expects that any sum it may be required to pay in
connection with environmental matters is not reasonably likely to exceed the
liability by an amount that would have a material adverse effect on its
F-26
<PAGE>
financial position, results of operations or cash flows. All of these estimates
are forward-looking statements and, given the inherent uncertainties in
evaluating environmental exposures, actual results can differ from these
estimates.
CONTINGENCIES
- -------------
Eaton is subject to a broad range of claims, administrative proceedings,
and legal proceedings, such as lawsuits that relate to contractual
allegations, patent infringement, personal injuries (including asbes-
tos claims) and employment-related matters. Although it is not pos-
sible to predict with certainty the outcome or cost of these matters,
the Company believes that these matters will not have a material ad-
verse effect on its financial position, results of operations or cash flows.
SHAREHOLDERS' EQUITY
- --------------------
On January 21, 2004, the Board of Directors of Eaton declared a two-for-one
split of the Company's Common Shares effective in the form of a 100% stock
dividend. The record date for the stock split was February 9, 2004, and the
distribution date was February 23, 2004. Accordingly, all Common Share data and
per shares amounts presented have been adjusted to reflect the stock split.
There are 300 million Common Shares authorized ($.50 par value per share), 153.3
million of which were issued and outstanding at year-end 2004. At December 31,
2004, there were 9,641 holders of record of Common Shares. Additionally, 22,016
current and former employees were shareholders through participation in the
Eaton Savings Plan (ESP) and Eaton Personal Investment Plan (EPIP).
In January 2004, Eaton initiated a plan to repurchase 4.2 million of its Common
Shares to offset the shares issued during 2003 from the exercise of stock
options. During first quarter 2004, the shares were repurchased at a total cost
of $250.
In June 2003, Eaton sold 7.4 million shares for net proceeds of $296, which were
used to pay down commercial paper and for general corporate purposes.
Eaton has plans that permit certain employees and directors to defer a portion
of their compensation. The Company has deposited $34 of Common Shares and
marketable securities 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 at historical cost.
Stock Options
- -------------
Stock options have been granted to certain employees and directors, under
various plans, to purchase Common Shares at prices equal to fair market value on
the date of grant. Historically, the majority of these options vest ratably
during the three-year period following the date of grant and expire 10 years
from the date of grant.
During 1997 and 1998, Eaton granted special performance-vested stock options
with a 10-year vesting term in lieu of more standard employee stock options.
F-27
<PAGE>
These options have a provision for accelerated vesting if and when the Company
achieves certain net income and Common Share price targets. If the targets are
not achieved, these options become exercisable 10 days before the expiration of
their 10-year term. As of December 31, 2004, 2.8 million special
performance-vested stock options were outstanding of which 1.0 million were
exercisable.
A summary of stock option activity follows (shares in millions):
<TABLE>
<CAPTION>
2004 2003 2002
----------------- ----------------- -----------------
Average Average Average
price price price
per per per
option Options option Options option Options
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding January 1 $33.22 17.2 $31.70 19.2 $29.98 19.8
Granted 59.12 2.4 35.46 2.6 40.42 2.2
Exercised 30.78 (4.6) 27.43 (4.2) 23.34 (2.0)
Canceled 41.34 (.3) 35.28 (.4) 35.28 (.8)
---- ---- ----
Outstanding December 31 $37.97 14.7 $33.22 17.2 $31.70 19.2
==== ==== ====
Exercisable December 31 $33.65 8.2 $31.50 10.5 $29.44 12.6
Reserved for future
grants December 31 9.0 4.0 6.2
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable at December 31, 2004 (shares in millions):
<TABLE>
<CAPTION>
Weighted- Weighted-
Weighted- average average
average exercise exercise
Options remaining price per Options price per
Range of exercise out- contractual outstanding exerci- exercisable
prices per option standing life (years) option sable option
- ----------------- -------- ------------ ----------- ------- -----------
<S> <C> <C> <C> <C> <C>
$20.90 - $22.81 .6 .7 $22.16 .6 $22.16
$29.44 - $30.91 5.1 3.4 30.81 3.6 30.77
$31.93 - $39.68 4.9 6.2 36.15 2.8 36.30
$40.58 - $40.60 1.7 7.0 40.60 1.0 40.60
$40.98 - $47.88 .2 6.3 42.99 .2 43.07
$59.07 2.2 9.2 59.07
---- ---
14.7 8.2
==== ===
</TABLE>
Eaton 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-based method
of SFAS No. 123, net income and net income per Common Share would have been as
follows:
F-28
<PAGE>
<TABLE>
<CAPTION>
2004 2003 2002
----- ----- -----
<S> <C> <C> <C>
Net income
- ----------
As reported $ 648 $ 386 $ 281
Stock-based compensation expense, net of income taxes (13) (11) (14)
----- ----- -----
Assuming fair-value-method $ 635 $ 375 $ 267
===== ===== =====
Net income per Common Share assuming dilution
- ---------------------------------------------
As reported $4.13 $2.56 $1.96
Stock-based compensation expense, net of income taxes (.08) (.08) (.10)
----- ----- -----
Assuming fair-value-method $4.05 $2.48 $1.86
===== ===== =====
Net income per Common Share basic
- ---------------------------------
As reported $4.24 $2.61 $1.99
Stock-based compensation expense, net of income taxes (.09) (.08) (.10)
----- ----- -----
Assuming fair-value-method $4.15 $2.53 $1.89
===== ===== =====
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes option
pricing model with the following assumptions:
<TABLE>
<CAPTION>
2004 2003 2002
------------ ------------ ------------
<S> <C> <C> <C>
Dividend yield 2.5% 2.5% 2.5%
Expected volatility 28% 28% 29%
Risk-free interest rate 3.1% to 3.8% 2.2% to 3.5% 2.6% to 4.3%
Expected option life in years 5 5 4
Weighted-average per
share fair value of options
granted during the year $13.29 $7.84 $9.17
</TABLE>
Preferred Share Purchase Rights
- -------------------------------
In 1995, the Board of Directors of Eaton 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 that
threshold for triggering the Rights to not less than 10%. The Rights expire on
July 12, 2005, unless redeemed earlier at $.005 per Right.
When the Rights become exercisable, the holder of each Right, other than the
acquiring person, is entitled 1) to purchase for $125, one two-hundredth of a
Preferred Share, 2) to purchase for $125, that number of Eaton's Common
F-29
<PAGE>
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 two-hundredth of a Preferred Share.
Accumulated Other Comprehensive Loss
- ------------------------------------
The components of Accumulated other comprehensive loss as reported in the
Statement of Consolidated Shareholders' Equity follow:
<TABLE>
<CAPTION>
Unrealized Deferred Minimum
Foreign gain (loss) gain pension
currency on available (loss) on liability
translation for sale cash flow adjust-
adjustments investments hedges ment Total
----------- ------------ --------- --------- -----
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 2002 $(274) $ 1 $ (5) $ (21) $(299)
2002 activity,
net of income taxes (15) 1 (386) (400)
----- --- ----- ----- -----
Balance at
December 31, 2002 (289) 1 (4) (407) (699)
2003 activity,
net of income taxes 126 1 4 (17) 114
----- --- ----- ----- -----
Balance at
December 31, 2003 (163) 2 0 (424) (585)
2004 activity,
net of income taxes 99 (2) (2) (48) 47
----- --- ----- ----- -----
Balance at
December 31, 2004 $ (64) $ 0 $ (2) $(472) $(538)
===== === ===== ===== =====
</TABLE>
A discussion of the minimum pension liability adjustment is included in
"Retirement Benefit Plans" above.
INCOME TAXES
- ------------
For financial statement reporting purposes, income before income taxes, based on
the geographic location of the operation to which such earnings are
attributable, is summarized below. Certain foreign operations are branches of
Eaton 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. For purposes of
this note to the consolidated financial statements, non-United States operations
include Puerto Rico.
<TABLE>
<CAPTION>
Income
before income taxes
-------------------
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
United States $124 $ 78 $ 56
Non-United States 657 430 343
</TABLE>
F-30
<PAGE>
<TABLE>
<S> <C> <C> <C>
---- ---- ----
$781 $508 $399
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Income tax expense
-------------------
2004 2003 2002
----- ---- ----
<S> <C> <C> <C>
Current
- -------
United States
Federal $ 131 $ 97 $123
State & local 5 17 6
Non-United States 128 70 42
----- ---- ----
264 184 171
----- ---- ----
Deferred
- --------
United States (131) (67) (71)
Non-United States 5 18
----- ---- ----
(131) (62) (53)
----- ---- ----
$ 133 $122 $118
===== ==== ====
</TABLE>
Reconciliations of income taxes from the United States Federal statutory rate to
the effective income tax rate follow:
<TABLE>
<CAPTION>
2004 2003 2002
----- ----- ----
<S> <C> <C> <C>
Income taxes at the United States statutory rate 35.0% 35.0% 35.0%
United States state & local income taxes .6 3.2 1.4
Other United States-net (5.1) (1.4) 1.4
Non-United States operations (earnings taxed at other
than United States tax rate) (13.5) (12.8) (8.3)
----- ----- ----
17.0% 24.0% 29.5%
===== ===== ====
</TABLE>
In fourth quarter 2004, Eaton recorded an income tax benefit of $30 resulting
from the favorable resolution of multiple international and United States income
tax items. This income tax benefit reduced the effective income tax rate for
full year 2004 from 20.8% to 17.0%.
Eaton has manufacturing operations in Puerto Rico, which operate under certain
United States tax law incentives related to the repatriation of earnings that,
at this point, are not expected to be available after 2005. Income tax credits
claimed under these incentives were $33 in 2004, $32 in 2003 and $33 in 2002.
Management believes the elimination of these repatriation laws will not have an
adverse impact on the Company's effective income tax rate.
F-31
<PAGE>
Significant components of current and long-term deferred income taxes follow:
<TABLE>
<CAPTION>
2004 2003
---------------- ----------------
Long- Long-
Current term Current term
assets assets assets assets
------- ------ ------- ------
<S> <C> <C> <C> <C>
Accruals & other adjustments
Employee benefits $ 57 $ 427 $ 63 $ 382
Depreciation & amortization (5) (279) (4) (412)
Other 161 80 130 59
Other items 3 8 3 (1)
United States Federal income
tax credit carryforwards 86 77
United States Federal tax loss
carryforwards 7
United States state & local tax loss
carryforwards 52 46
United States foreign tax credit
carryforwards 21
Non-United States tax loss carryforwards 80 51
Valuation allowance (132) (109)
---- ----- ---- -----
$216 $ 329 $192 $ 114
==== ===== ==== =====
</TABLE>
At the end of 2004, United States Federal income tax credit carryforwards of $86
are available to reduce future Federal income tax liabilities. These credits
include $47 which expire in 2021 through 2024, and $39 of which are not subject
to expiration. There are also United States state and local pretax income
loss carryforwards with a future tax benefit of $52 available at the end of
2004. These carryforwards are available to reduce future state and local income
tax liabilities and their expiration dates are $13 in 2005 through 2015, $18 in
2016 through 2020, and $21 in 2021 through 2025. A full valuation allowance has
been recorded for the state and local income tax loss carryforwards.
At December 31, 2004, certain non-United States subsidiaries had pretax income
loss carryforwards aggregating $261 that are available to offset future taxable
income. Carryforwards of $122 expire at various dates from 2005 through 2014 and
the balance have no expiration date. A valuation allowance of $80 has been
recorded for the deferred tax effect of these tax loss carryforwards.
No provision has been made for income taxes on undistributed earnings of
consolidated non-United States subsidiaries of $1,598 at December 31, 2004,
since the earnings retained have been reinvested by the subsidiaries. It is not
practicable to estimate the additional income taxes and applicable foreign
withholding taxes that would be payable on the remittance of such undistributed
earnings.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed
into law. The Act provides for a special one-time tax deduction of 85% of
F-32
<PAGE>
certain foreign earnings that are repatriated (as defined in the Act) in 2005.
Eaton has not fully evaluated the effects of the repatriation provision and,
therefore, has not determined if the Act will materially change its foreign
earnings reinvestment plan. A full evaluation of the plan is expected to be
complete by June 30, 2005.
Worldwide income tax payments were $161 in 2004, $137 in 2003 and $61 in 2002.
OTHER INFORMATION
- -----------------
Accounts Receivable
- -------------------
Accounts receivable were net of an allowance for doubtful accounts of $32 and
$23 at December 31, 2004 and 2003, respectively.
Inventories
- -----------
The components of inventories follow:
<TABLE>
<CAPTION>
2004 2003
------ ----
<S> <C> <C>
Raw materials $ 398 $301
Work-in-process 206 173
Finished goods 412 279
------ ----
Inventories at FIFO 1,016 753
Excess of FIFO over LIFO cost (50) (32)
------ ----
$ 966 $721
====== ====
</TABLE>
Of the $1,016 of inventories at FIFO at year-end 2004, $572 were accounted for
using the LIFO method. Of the $753 of inventories at FIFO at year-end 2003, $432
were accounted for using the LIFO method.
Warranty Liabilities
- --------------------
A summary of the current and long-term liabilities for warranties follows:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- -----
<S> <C> <C> <C>
Balance at the beginning of the year $125 $127 $ 128
Current year provision 108 81 129
Business acquisition 12
Claims paid/satisfied (94) (82) (119)
Other 1 (1) (11)
---- ---- -----
Balance at the end of the year $152 $125 $ 127
==== ==== =====
</TABLE>
Lease Commitments
- -----------------
Eaton leases certain real properties and equipment. Minimum rental commitments
for 2005 under noncancelable operating leases, which expire at various dates
F-33
<PAGE>
and in most cases contain renewal options, were $97 and decline substantially
thereafter.
Rental expense was $113 in 2004, $115 in 2003, and $102 in 2002.
Net Income Per Common Share
- ---------------------------
A summary of the calculation of net income per Common Share assuming dilution
and basic follows (shares in millions):
<TABLE>
<CAPTION>
2004 2003 2002
------ ------ ------
<S> <C> <C> <C>
Net income $ 648 $ 386 $ 281
====== ====== ======
Average number of Common Shares
outstanding assuming dilution 157.1 150.5 143.4
Less dilutive effect of stock options 4.0 2.6 2.2
------ ------ ------
Average number of Common Shares
outstanding basic 153.1 147.9 141.2
====== ====== ======
Net income per Common Share
assuming dilution $ 4.13 $ 2.56 $ 1.96
Net income per Common Share
basic $ 4.24 $ 2.61 $ 1.99
</TABLE>
In 2002, employee and director stock options to purchase Common Shares of 6.0
million 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.
BUSINESS SEGMENT & GEOGRAPHIC REGION INFORMATION
- ------------------------------------------------
Eaton is a global diversified industrial manufacturer with 2004 sales of $9.8
billion. The Company is a leader in the design, manufacture, marketing and
servicing of fluid power systems for industrial, mobile, and aircraft equipment;
electrical systems and components for power quality, distribution and control;
automotive engine air management systems, powertrain solutions and specialty
controls for performance, fuel economy and safety; and intelligent truck
drivetrain systems for safety and fuel economy. The Company had 55,000 employees
at the end of 2004 and sells products to customers in more than 125 countries.
Major products included in each business segment and other information follows.
Fluid Power
- -----------
All pressure ranges of hose, fittings, adapters, couplings and other fluid power
connectors; hydraulic pumps, motors, valves, cylinders, power steering units,
tube connectors, fittings, 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
F-34
<PAGE>
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
Electrical
- ----------
Low and medium voltage power distribution and control products that meet
ANSI/NEMA and IEC standards; a wide range of circuit breakers, and a variety of
assemblies and components used in managing distribution of electricity to
industrial, utility, light commercial, residential and OEM markets; drives,
contactors, starters, power factor and harmonic correction; a wide range of
sensors used for position sensing; a full range of operator interface hardware
and software for interfacing with machines, and other motor control products
used in the control and protection of electrical power distribution systems; a
full range of AC and DC Uninterruptible Power Systems (UPS); power management
software, remote monitoring, turnkey integration services and site support
engineering services for electrical power and control systems
Automotive
- ----------
Engine valves, valve actuation components, engine displacement control
components, cylinder heads, superchargers, limited slip and locking
differentials, precision gear forgings, engine sensors and controls, mirror
actuators, transmission controls, on-board vapor recovery systems, fuel level
senders, exhaust gas recirculation valves for heavy-duty engines, flow and
pressure controls for direct injection diesel engines, engine oil manifold
controls, turbocharger waste gate controls, intake manifold control valves, and
air control valves
Truck
- -----
Heavy-, medium-, and light-duty mechanical transmissions; heavy- and medium-duty
automated transmissions; heavy- and medium-duty clutches; and a variety of other
products including gears and shafts, traction control systems, transfer boxes,
power take-off units, splitter boxes, gearshift mechanisms, transmissions for
off-highway construction equipment, and collision warning systems
Other Information
- -----------------
The principal markets for Fluid Power, Automotive and Truck are original
equipment manufacturers and after-market customers of off-highway agricultural
and construction vehicles, industrial equipment, passenger cars, heavy-,
medium-, and light-duty trucks, and customers involved with aerospace products
and systems. These manufacturers are located globally and most sales of these
products are made directly to such manufacturers.
The principal markets for Electrical are industrial, construction, commercial,
automotive and government customers. These customers are generally concentrated
in North America, Europe and Asia/Pacific; however, sales are made globally.
Sales are made directly by Eaton and indirectly through distributors and
manufacturers' representatives to such customers.
F-35
<PAGE>
No single customer represented more than 10% of net sales in 2004, 2003 or 2002.
Sales from United States and Canadian operations to customers in foreign
countries were $504 in 2004, $437 in 2003 and $503 in 2002 (5% of sales in 2004
and 2003 and 7% in 2002).
The accounting policies of the segments are generally the same as the policies
described under "Accounting Policies" above, except that inventories and related
cost of products sold of the segments are accounted for using the FIFO method
and operating profit only reflects the service cost component related to
pensions and other postretirement benefits. Intersegment sales and transfers 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 cash, short-term investments, deferred income taxes, certain accounts
receivable, certain property, plant and equipment, and certain other assets.
F-36
<PAGE>
GEOGRAPHIC REGION INFORMATION
- -----------------------------
<TABLE>
<CAPTION>
Segment
Net operating Long-lived
sales profit assets
------ --------- ----------
<S> <C> <C> <C>
2004
- ----
United States $6,843 $ 774 $1,215
Canada 261 37 16
Europe 1,990 150 547
Latin America 774 107 244
Asia/Pacific 679 85 125
Eliminations (730)
------ ------ ------
$9,817 $1,153 $2,147
====== ====== ======
2003
- ----
United States $5,758 $ 546 $1,264
Canada 209 28 16
Europe 1,581 94 491
Latin America 516 65 205
Asia/Pacific 504 64 100
Eliminations (507)
------ ------ ------
$8,061 $ 797 $2,076
====== ====== ======
2002
- ----
United States $5,605 $ 483 $1,338
Canada 185 15 13
Europe 1,110 65 351
Latin America 403 45 160
Asia/Pacific 358 43 93
Eliminations (452)
------ ------ ------
$7,209 $ 651 $1,955
====== ====== ======
</TABLE>
Net sales and segment operating profit are attributed to geographical regions
based upon the location of the selling unit. Long-lived assets consist of
property, plant and equipment-net.
Segment operating profit was reduced by restructuring charges as follows:
<TABLE>
<CAPTION>
2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
United States $22 $22 $49
Europe 18 11 10
Asia/Pacific 1 3
--- --- ---
$41 $36 $59
=== === ===
</TABLE>
F-37
<PAGE>
BUSINESS SEGMENT INFORMATION
- ----------------------------
<TABLE>
<CAPTION>
2004 2003 2002
------ ------ ------
<S> <C> <C> <C>
Net sales
- ---------
Fluid Power $3,098 $2,786 $2,456
Electrical 3,072 2,313 1,993
Automotive 1,847 1,690 1,594
Truck 1,800 1,272 1,166
------ ------ ------
$9,817 $8,061 $7,209
====== ====== ======
Operating profit
- ----------------
Fluid Power $ 338 $ 247 $ 187
Electrical 243 158 149
Automotive 243 224 225
Truck 329 168 90
------ ------ ------
1,153 797 651
Corporate
- ---------
Amortization of intangible assets (25) (21) (23)
Interest expense-net (78) (87) (104)
Minority interest (7) (12) (14)
Pension & other postretirement
benefit expense (75) (52)
Provision to exit a business (15)
Gain on sale of business 18
Other corporate expense-net (172) (117) (129)
------ ------ ------
Income before income taxes 781 508 399
Income taxes 133 122 118
------ ------ ------
Net income $ 648 $ 386 $ 281
====== ====== ======
</TABLE>
Income before income taxes was reduced by restructuring charges as follows:
<TABLE>
<S> <C> <C> <C>
Fluid Power $ 8 $14 $26
Electrical 33 22 16
Automotive 1
Truck 16
Corporate 1 3
--- --- ---
$41 $37 $62
=== === ===
</TABLE>
F-38
<PAGE>
<TABLE>
<CAPTION>
2004 2003 2002
------ ------ ------
<S> <C> <C> <C>
Identifiable assets
- -------------------
Fluid Power $1,527 $1,422 $1,439
Electrical 1,469 1,072 847
Automotive 974 872 819
Truck 940 690 605
------ ------ ------
4,910 4,056 3,710
Goodwill 2,433 2,095 1,910
Other intangible assets 644 541 510
Corporate 1,088 1,531 1,008
------ ------ ------
Total assets $9,075 $8,223 $7,138
====== ====== ======
Expenditures for
property, plant & equipment
- ---------------------------
Fluid Power $ 83 $ 60 $ 53
Electrical 55 37 34
Automotive 91 86 75
Truck 90 71 56
------ ------ ------
319 254 218
Corporate 11 19 10
------ ------ ------
$ 330 $ 273 $ 228
====== ====== ======
Depreciation of
property, plant & equipment
- ---------------------------
Fluid Power $ 91 $ 92 $ 91
Electrical 83 80 70
Automotive 84 77 69
Truck 61 54 54
------ ------ ------
319 303 284
Corporate 23 19 22
------ ------ ------
$ 342 $ 322 $ 306
====== ====== ======
</TABLE>
F-39
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- ------------------------------------------------------------------------
Dollars in millions, except for per share data (per share data assume dilution)
OVERVIEW OF THE COMPANY
- -----------------------
Eaton, a diversified industrial manufacturer, is a global leader in the design,
manufacture, marketing and servicing of fluid power systems for industrial,
mobile, and aircraft equipment; electrical systems and components for power
quality, distribution and control; automotive engine air management systems,
powertrain solutions and specialty controls for performance, fuel economy and
safety; and intelligent truck drivetrain systems for safety and fuel economy.
The principal markets for the Fluid Power, Automotive and Truck segments are
original equipment manufacturers and after-market customers of off-highway
agricultural and construction vehicles, industrial equipment, passenger cars,
heavy-, medium-, and light-duty trucks, and customers involved with aerospace
products and systems. The principal markets for the Electrical segment are
industrial, construction, commercial, automotive and government customers. The
Company had 55,000 employees at the end of 2004 and sells products to customers
in more than 125 countries.
HIGHLIGHTS OF RESULTS FOR 2004
- ------------------------------
Improved economic conditions in 2004 set the stage for Eaton to post record
financial results, with each business segment reporting improved performance
during 2004. During the year, Eaton continued to make progress towards key
corporate goals of 1) accelerating organic growth by outgrowing end markets, 2)
acquiring and integrating new businesses and 3) further strengthening the
balance sheet.
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $9,817 $8,061 22%
Operating profit 1,153 797 45%
Operating margin 11.7% 9.9%
Net income 648 386 68%
Net income per Common
Share assuming dilution $ 4.13 $ 2.56 61%
Return on Shareholders'
equity 20.1% 14.4%
</TABLE>
Net sales in 2004 were at a record level for Eaton, surpassing the record set in
2003. Sales growth of 22% in 2004 consisted of 12% from organic growth with 8%
from end-market growth and 4% from outgrowing end markets; 7% from acquisitions
of businesses; and 3% from foreign exchange rates. In each quarter of 2004 there
was positive growth in end markets served by the Company, and, in 2004, Eaton's
businesses outgrew their end markets by approximately 50%.
Operating profit in 2004 was a record for Eaton. The growth in operating profit
was largely due to sales growth and the benefits of restructuring actions taken
in recent years to improve profit performance of the Company. These increases
F-40
<PAGE>
were partially offset by higher prices paid primarily for basic metals in 2004.
The impact of higher metals costs, partially offset by increased selling prices
to recover these higher costs, was a 1.0 point reduction in operating margin.
Net income and net income per Common Share assuming dilution were also records
for Eaton in 2004. These record results were primarily due to the sales growth
in 2004 and the benefits of restructuring actions taken in recent years. In
addition, lower net interest expense and a reduction in the effective income tax
rate helped the Company to post improved net income. These increases in net
income in 2004 were partially offset by higher prices paid primarily for basic
metals, higher costs for pensions and other postretirement benefits in 2004, a
provision of $15 to exit a business, and a $13 contribution to the Eaton
Charitable Fund.
On June 9, 2004, Eaton acquired Powerware Corporation, the power systems
business of Invensys plc, for $560 of cash, less cash acquired of $27.
Powerware, based in Raleigh, North Carolina, is a global leader in
Uninterruptible Power Systems (UPS), DC Power products, and power quality
services. Powerware had revenues of $775 for the year ended March 31, 2004.
Powerware has operations in the United States, Canada, Europe, South America and
Asia/Pacific that provide products and services utilized by computer
manufacturers, industrial companies, governments, telecommunications firms,
medical institutions, data centers and other businesses. Eaton's operating
results for 2004 include Powerware from the date of acquisition. This business
is included in the Electrical segment.
On September 1, 2004, Eaton acquired Walterscheid Rohrverbindungstechnik GmbH
(Walterscheid) from GKN plc for $48 of cash. Walterscheid, a manufacturer of
hydraulic tube connectors and fittings primarily for the European market, had
2003 sales of $52 and is located in Lohmar, Germany. Its products are used in
mobile and industrial hydraulic markets such as construction and agricultural
equipment and machine tools. Eaton's operating results for 2004 include
Walterscheid from the date of acquisition. This business is included in the
Fluid Power segment.
Also in September 2004, Eaton contributed $28 of cash to purchase a 50% interest
in a new medium-duty truck transmission joint venture located in Changchun,
China. The partner in this venture is FAW Jiefang Automotive Co., Ltd., which is
the commercial vehicle subsidiary of China First Auto Works Group Company (FAW),
the largest manufacturer of commercial vehicles in China. Eaton's operating
results include this joint venture, which is accounted for under the equity
method, beginning in September 2004. This business is included in the Truck
segment. The Company also acquired other smaller businesses in 2004 for an
aggregate investment cost of $17. The sales of these businesses were immaterial
in 2004.
Throughout 2004, Eaton maintained a strong focus on strengthening the balance
sheet. Total debt of $1,773 at the end of 2004 was reduced by $180 from $1,953
at year-end 2003, due to a net repayment of debt totaling $206, partially offset
by a $22 increase in long-term debt denominated in foreign currencies due to
movement of foreign exchange rates in 2004. Shareholders' equity of $3,606 at
the end of 2004 was a new record, rising $489 from $3,117 at year-end 2003. The
net-debt-to-total-capital ratio was 29.1%, below the Company's target of 35 to
40%. Net working capital of $920 at the end of 2004 was down $47 from $967 at
year-end 2003, in spite of the increase in working capital due to acquisitions
of Powerware and other businesses. The current ratio was 1.4 at both year-ends.
F-41
<PAGE>
Cash and short-term investments totaled $296 at the end of 2004, down from $865
at year-end 2003, reflecting the use of $627 to finance the acquisitions of
Powerware and other businesses, the repurchase of 4.2 million Common Shares at a
total cost of $250, a $75 contribution to the Company's United States qualified
pension plans, and a net repayment of debt of $206, partially offset by strong
cash flow from operations.
Cash generated from operating activities of $838 in 2004 continued to be strong,
as a result of sharply higher net income in 2004, but was slightly lower than
$874 in 2003, principally due to a $75 contribution to the Company's United
States qualified pension plans and $57 of higher capital expenditures in 2004.
Operating cash flow less capital expenditures (free cash flow) was $508 in 2004,
down from $601 in 2003, reflecting the $75 contribution to the United States
qualified pension plans.
In light of the strong results for 2004 and continuing momentum in most of its
markets, on January 24, 2005 Eaton announced that it was taking the following
actions:
- Increasing the quarterly dividend on its Common Shares by 15%, from
$.27 per share to $.31 per share, effective for the February 2005
dividend
- Initiating a plan to repurchase $250 of shares to help offset dilution
from the shares issued during 2004 from the exercise of stock options
- Contributing $50 to its qualified pension plans in the United States
during 2005
TWO-FOR-ONE STOCK SPLIT
- -----------------------
On January 21, 2004, the Board of Directors of Eaton declared a two-for-one
split of the Company's Common Shares effective in the form of a 100% stock
dividend. The record date for the stock split was February 9, 2004, and the
distribution date was February 23, 2004. Accordingly, all Common Share data and
per share amounts presented have been adjusted to reflect the stock split.
RESULTS OF OPERATIONS - 2004 COMPARED TO 2003
- ---------------------------------------------
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $9,817 $8,061 22%
Operating profit 1,153 797 45%
Operating margin 11.7% 9.9%
Net income 648 386 68%
Net income per Common
Share assuming dilution $ 4.13 $ 2.56 61%
</TABLE>
Sales for 2004 were up sharply compared to 2003 and were a record for Eaton.
Sales growth of 22% in 2004 consisted of 12% from organic growth, 7% from
F-42
<PAGE>
recently acquired businesses, and 3% from foreign exchange rates. Organic growth
of 12% was comprised of 8% growth in Eaton's end markets and 4% from outgrowing
end markets.
Operating profit in 2004 was also a record for Eaton. The growth in operating
profit was due to sales growth and the benefits of restructuring actions taken
in recent years. These increases were partially offset by higher prices paid
primarily for basic metals in 2004. Operating margins were reduced by .4% in
both 2004 and 2003 due to restructuring charges. Operating margins in 2004
increased compared to 2003 despite higher prices paid primarily for basic metals
and the addition of the Powerware business, whose margins are currently lower
than the rest of the Electrical segment. The operating results of each business
segment are further discussed below, under "Results by Business Segment".
RESULTS BY GEOGRAPHIC REGION
- ----------------------------
<TABLE>
<CAPTION>
Operating
Net sales Operating profit margin
-------------------------- -------------------------- -----------
2004 2003 Increase 2004 2003 Increase 2004 2003
------ ------ -------- ------ ------ -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $6,843 $5,758 19% $ 774 $546 42% 11.3% 9.5%
Canada 261 209 25% 37 28 32% 14.2% 13.4%
Europe 1,990 1,581 26% 150 94 60% 7.5% 6.0%
Latin America 774 516 50% 107 65 65% 13.8% 12.6%
Asia/Pacific 679 504 35% 85 64 33% 12.5% 12.7%
Eliminations (730) (507)
------ ------ ------ ----
$9,817 $8,061 22% $1,153* $797* 45% 11.7% 9.9%
====== ====== ====== ====
</TABLE>
* A reconciliation of operating profit to net income is included in "Business
Segment Information" in the Notes to the Consolidated Financial Statements.
Growth in sales in the United States was due to higher sales in Electrical,
largely the result of the acquisition of Powerware in June 2004; sharply higher
sales in Truck due to rapid growth in many of Truck's markets; and, to a lesser
extent, increased sales in Fluid Power and Automotive. The increase in operating
profit in the United States was primarily the result of strong sales in Truck,
the acquisition of Powerware, the benefits of restructuring actions taken in
recent years, and integration of recently acquired businesses. In Canada, growth
in sales and operating profit were due to the acquisition of Powerware and
improved results in other Electrical businesses. Sales growth in Europe was due
to higher sales in Electrical, largely the result of the acquisition of
Powerware; growth in Fluid Power, Automotive and Truck; and from foreign
exchange rates. Higher operating profit in Europe was the result of increased
sales and the benefits of restructuring actions taken in recent years that were
reflected in improved returns in each of the Company's four business segments.
Growth in sales and operating profit in Latin America were due to sharply higher
sales in Truck, the acquisition of Powerware adding sales in Electrical, and to
a lesser extent sales growth in Fluid Power and Automotive. The growth in sales
in Asia/Pacific was due to the acquisition of Powerware and the strong
performance of Fluid Power and Truck. The increase in operating profit in
F-43
<PAGE>
Asia/Pacific primarily related to the acquisition of Powerware and improved
results of Fluid Power.
In 2004, Eaton incurred restructuring charges related primarily to the
integration of: Powerware, the electrical power systems business acquired in
June 2004; the electrical division of Delta plc, acquired in January 2003; and
the Boston Weatherhead fluid power business, acquired in November 2002. In 2003,
restructuring charges related primarily to the integration of the electrical
division of Delta plc and the Boston Weatherhead fluid power business. A summary
of these charges follows:
<TABLE>
<CAPTION>
2004 2003
---- ----
<S> <C> <C>
Fluid Power $ 8 $ 14
Electrical 33 22
---- ----
41 36
Corporate 1
---- ----
Pretax charges $ 41 $ 37
==== ====
After-tax charges $ 27 $ 24
Per Common Share $.17 $.16
</TABLE>
Restructuring charges in 2004 included $22 for the United States, $18 for Europe
and $1 for Asia/Pacific. Restructuring charges in 2003 included $23 for the
United States, $11 for Europe and $3 for Asia/Pacific. The restructuring charges
were included in the Statements of Consolidated Income in Cost of products sold
or Selling & administrative expense, as appropriate. In Business Segment
Information the charges reduced Operating profit of the related business segment
or were included in Other corporate expense-net, as appropriate.
Pretax income for 2004 was reduced by $31 ($20 after-tax, or $.13 per Common
Share) compared to 2003 due to increased pension and other postretirement
benefit expense in 2004. This resulted from the decline over the last several
years in the market value of equity investments held by Eaton's pension plans,
coupled with the effect of the lowering of discount rates associated with
pension and other postretirement benefit liabilities at year-end 2003. These
increased costs were partially offset by the effect of the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, as further explained in
"Retirement Benefit Plans" in the Notes to the Consolidated Financial
Statements.
In December 2004, Eaton announced that it would exit its legacy tire and
refrigeration valve manufacturing business within the next year. The Company
incurred charges of $15 ($10 after-tax, or $.06 per Common Share) principally
for the write-down of fixed assets and workforce reductions. This business is in
the Automotive segment. In the Statements of Consolidated Income and Business
Segment Information, these charges were reported as a separate line item.
In 2004, a charge of $13 was recorded for a contribution to the Eaton Charitable
Fund ($8 after-tax, or $.05 per Common Share). In the Statements of Consolidated
Income, the charge was included in Other (income) expense-net. In Business
F-44
<PAGE>
Segment Information, the charge was included in Other corporate expense-net.
The effective income tax rate for 2004 was 17.0% compared to 24.0% in 2003. The
lower rate in 2004 was primarily due to an income tax benefit of $30 resulting
from the favorable resolution of multiple international and U.S. income tax
items in fourth quarter 2004, higher earnings in international tax jurisdictions
with lower income tax rates, increased use of foreign tax credit carryforwards,
and implementation of international tax planning initiatives. The change in the
effective income tax rate in 2004 compared to 2003 is further explained in
"Income Taxes" in the Notes to the Consolidated Financial Statements.
RESULTS BY BUSINESS SEGMENT
- ---------------------------
Fluid Power
- -----------
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $3,098 $2,786 11%
Operating profit 338 247 37%
Operating margin 10.9% 8.9%
</TABLE>
Sales of the Fluid Power segment were at record levels in 2004. The majority of
sales growth in 2004 resulted from the strong performance of mobile and
industrial hydraulics markets. The commercial aerospace market also began to
recover in 2004, growing in the fourth quarter at its fastest rate in over two
years. The 11% increase in sales includes 3% due to foreign exchange rates and
reflects the growth in Fluid Power's markets of 8% over 2003, with global
hydraulics markets up an estimated 13%, commercial aerospace markets up 3%,
defense aerospace markets up 7%, and European automotive production up 1%.
Operating results for 2004 included Walterscheid from the date of acquisition,
as discussed in "Highlights of Results for 2004" above, with less than 1% of the
increase in sales attributed to this acquisition in 2004.
Operating profit in 2004 was also a record. Higher operating profit in 2004 was
largely due to sales growth, the benefits of restructuring actions to integrate
acquired businesses, and continued productivity improvements, partially offset
by higher prices paid primarily for basic metals. Restructuring charges in 2004
were $8 compared to $14 in 2003, reducing operating margins by .3% in 2004 and
..5% in 2003. The restructuring charges in 2004 and 2003 related primarily to the
integration of the Boston Weatherhead business acquired in late 2002.
In January 2004, Eaton acquired Ultronics Limited with its advanced
electro-hydraulic valve system technology that is utilized in mobile
applications in construction, forestry, agriculture and other markets. In early
2004, Eaton invested in Eaton Senstar Automotive Fluid Connector (Shanghai) Co.,
Ltd. This business, 55%-owned by Eaton, was formed with Changzhou Senstar
Automobile Air Conditioner Co. Ltd. to produce automotive air conditioning hose
and tube assemblies and power steering hose and tube assemblies in Shanghai for
Volkswagen's China operations. The purchase prices and annual sales of these
businesses were immaterial in 2004.
F-45
<PAGE>
In November 2004, Eaton announced that it signed an agreement to purchase the
businesses of Winner Group Holdings Ltd., a China-based company which is the
largest manufacturer of hydraulic hose fittings and adapters in China. This
business had sales in 2003 of $28. The purchase is expected to be completed in
late first quarter 2005.
In November 2004, Eaton announced that its aerospace business began work with
Lockheed Martin to increase the Company's role on the F-35 Joint Strike Fighter
by expanding its scope of work on the wing fluid delivery system. The expanded
wing fluid delivery work and increased technical assistance will increase
Eaton's potential revenue on the F-35 by $1 billion, based on production of
2,600 aircraft over the life of the program, which is expected to continue
through 2027. The $1 billion increase brings the expected Joint Strike Fighter
related revenue over the life of the program to almost $3 billion, including the
hydraulic power generation system, general actuation and the expanded wing fluid
delivery system work.
Electrical
- ----------
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $3,072 $2,313 33%
Operating profit 243 158 54%
Operating margin 7.9% 6.8%
</TABLE>
Sales of the Electrical segment in 2004 reached record levels. Of the 33% sales
growth, 24% was from acquisitions, including Powerware acquired in June 2004, as
discussed in "Highlights of Results for 2004" above, and Electrum Group acquired
in March 2004, as discussed below. Sales for the full year of 2004 from the
electrical division of Delta plc acquired in January 2003, and the business
formed with Caterpillar in August 2003, also contributed to this growth from
acquisitions. Eaton's operating results for 2004 include the results of acquired
businesses from the dates of acquisition. End markets for the electrical
business grew about 4% during 2004 with sales above end-market growth
contributing an additional 3% to growth. Sales in 2004 improved by 2% due to
foreign exchange rates.
Increased operating profit in 2004 was largely due to growth in sales, the
benefits of restructuring actions to integrate acquired businesses, and
continued productivity improvements, partially offset by higher prices paid
primarily for basic metals. These improvements were partially offset by
increased restructuring charges in 2004. Restructuring charges in 2004 were $33
compared to $22 in 2003, reducing operating margins by 1.1% in 2004 and 1.0% in
2003. Restructuring charges in 2004 related primarily to the integration of
Powerware and the electrical division of Delta plc acquired in January 2003.
Restructuring charges in 2003 related largely to the integration of the
electrical division of Delta plc.
In March 2004, Eaton acquired the Electrum Group Ltd. which provides power
management services and web-based software for telecommunications, data center
and government applications. The net sales and purchase price of this company
were immaterial.
F-46
<PAGE>
During second quarter 2004, the Electrical business was awarded a contract from
the U.S. Postal Service to test and maintain electrical switchgear, which is
anticipated to generate between $12 and $15 of revenue annually over the next
four years, and a contract worth $10 to supply distribution and control
equipment for a new power plant being constructed by Hitachi.
Automotive
- ----------
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $1,847 $1,690 9%
Operating profit 243 224 8%
Operating margin 13.2% 13.3%
</TABLE>
Sales in the Automotive segment reached a new record in 2004, above the record
set in 2003, by growing 9%. The growth in Automotive's sales considerably
exceeded its end markets throughout the year. Automotive production for 2004 in
NAFTA was lower by 1% and in Europe increased 1% compared to 2003. Growth above
2003 was attributable to new program launches and new contract wins. Sales in
2004 also improved by 3% due to foreign exchange rates.
Increased operating profit in 2004 was the result of increased sales and
productivity improvements, partially offset by higher prices paid primarily for
basic metals.
In first quarter 2004, Eaton won contracts to supply locking differentials to
Hyundai and Kia for several new vehicle programs. Revenues from these contracts
are expected to total approximately $150 over the next six years.
Truck
- -----
<TABLE>
<CAPTION>
2004 2003 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $1,800 $1,272 42%
Operating profit 329 168 96%
Operating margin 18.3% 13.2%
</TABLE>
The Truck segment posted record sales in 2004, with revenues up 42% compared to
2003. This was attributable to end-market growth, primarily NAFTA heavy-duty
truck production of 263,000 units, an increase of 48% compared to 2003. NAFTA
medium-duty truck production increased 24% in 2004 compared to 2003, European
truck production increased 7%, and Brazilian vehicle production increased 20%.
Operating profit and operating margin in 2004 were also records. Increased
operating profit in 2004 reflected increased sales throughout all geographic
regions, as well as productivity improvements, partially offset by higher prices
paid primarily for basic metals.
Eaton made significant progress during 2004 on both of its recently announced
new truck businesses in China. The joint venture with FAW Jiefang Automotive
Co., Ltd. formally started production in September 2004 with Eaton contributing
F-47
<PAGE>
$28 of cash to purchase a 50% interest in the venture, as described in
"Highlights of Results for 2004" above. Operating results of this venture were
immaterial in 2004.
In addition, the Company started production in the Eaton Fast Gear (EFG)
heavy-duty truck transmission business in fourth quarter 2004. The formation of
EFG was announced in third quarter 2003. Eaton's partners in EFG are Shaanxi
Fast Gear Co., Ltd. and Xiang Torch Investment Co., Ltd. This business will
produce transmissions for the growing Chinese market. Eaton has 55% ownership of
the business. The purchase price and annual sales of this company were
immaterial in 2004.
On March 1, 2005, Eaton acquired Pigozzi S.A. Engrenagens e Transmissoes, an
agricultural powertrain business located in Caxias do Sul, Brazil. Pigozzi
produces agricultural powertrain products, including transmissions, rotors and
other drivetrain components, for tractors and harvesters. The business had 2004
sales of approximately $42. The purchase price for the business was $29.
Corporate
- ---------
Net interest expense of $78 in 2004 fell by $9 from $87 in 2003. The decrease
largely related to the $180 net reduction in total debt from the end of 2003 to
the end of 2004, offset by a slight increase in floating interest rates in 2004.
Pension and other postretirement benefit expense included in corporate increased
to $75 in 2004 from $52 in 2003. The increase primarily resulted from the
decline over the last several years in the market value of equity investments
held by Eaton's pension plans, coupled with the effect of the lower discount
rates used in determining pension and other postretirement benefit liabilities
at year-end 2003. These increased costs were partially offset by the effect of
the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, as
further explained in "Retirement Benefit Plans" in the Notes to the Consolidated
Financial Statements.
In December 2004, Eaton announced that it would exit its legacy tire and
refrigeration valve manufacturing business within the next year. The Company
incurred charges of $15 principally for the write-down of fixed assets and
workforce reductions.
Other corporate expense-net in 2004 was $172 compared to $117 for 2003. The
increase was largely attributable to a charge of $13 for contributions to the
Eaton Charitable Fund, foreign exchange expense, and higher corporate
administrative costs, as well as favorable legal settlements in 2003.
CHANGES IN FINANCIAL CONDITION DURING 2004
- ------------------------------------------
Throughout 2004, Eaton maintained a focus on strengthening the balance sheet.
Net working capital of $920 at the end of 2004 was down $47 from $967 at
year-end 2003, in spite of the increase in working capital due to the
acquisitions of Powerware and other businesses. The current ratio was 1.4 at
both year-ends. The decrease in net working capital was largely due to the
reduction in cash and short-term investments from $865 at the end of 2003 to
$296 at the end of 2004. The reduction of cash and short-term investments
F-48
<PAGE>
reflected the use of $627 to finance the acquisitions of Powerware and other
businesses, the repurchase of 4.2 million Common Shares at a total cost of $250,
a $75 contribution to the Company's United States qualified pension plans, and a
net repayment of debt of $206. These uses of cash and short-term investments
were offset by increased working capital due to business acquisitions, higher
accounts receivable resulting from increased sales in 2004, and strong cash flow
from operating activities in 2004. Inventory days on hand at the end of 2004
increased to 46 days compared to 43 days at year-end 2003, since the Company
purchased additional inventory to guard against basic metals shortages and, for
Truck operations, in anticipation of continued strong market demand in early
2005. Accounts receivable days outstanding increased to 55 days at the end of
2004 compared to 51 days at year-end 2003, due in part to the acquisition of
Powerware and significantly higher sales in fourth quarter 2004.
As a result of higher net income in 2004, cash generated from operating
activities of $838 continued to be strong, but was slightly lower than $874 in
2003, principally due to a $75 contribution to the Company's United States
qualified pension plans. Operating cash flow less capital expenditures (free
cash flow) was $508 in 2004, down from $601 in 2003, reflecting the $75
contribution to the United States qualified pension plans and $57 of higher
capital expenditures in 2004. Expenditures for property, plant and equipment
were $330 in 2004 compared to $273 in 2003. Capital expenditures for 2005 are
forecasted to be between $375 and $425.
Total debt of $1,773 at the end of 2004 was reduced by $180 from $1,953 at
year-end 2003, due to a net repayment of debt totaling $206, partially offset by
a $22 increase in long-term debt denominated in foreign currencies due to
movement of foreign exchange rates in 2004. Shareholders' equity of $3,606 at
the end of 2004 was a new record, rising $489 from $3,117 at year-end 2003. The
net-debt-to-total-capital ratio was 29.1%, below the Company's target of 35 to
40%. In March 2004, Eaton entered into a new $50 long-term revolving credit
facility which will expire in May 2008. Eaton has long-term revolving credit
facilities of $700, of which $400 expire in April 2005 and $300 expire in May
2008.
On January 28, 2005, Eaton issued $75 of 5.45% Senior Debentures, which mature
in 2034. This transaction brings the total amount of outstanding 5.45% Senior
Debentures due in 2034 to $150 and will form a single series with the $75 of
5.45% Senior Debentures due in 2034 issued on October 21, 2004. The Company used
the proceeds for general corporate purposes.
OUTLOOK FOR 2005
- ----------------
As Eaton surveyed its end markets in January 2005, it anticipated growth of
approximately 5% for full year 2005. The Company expects to outgrow its end
markets by about 50%, as it did in 2004, and also to record additional growth
from the full-year impact of the Powerware and Walterscheid acquisitions, the
ramp up of the Eaton Fast Gear heavy-duty truck transmission business in China,
and the acquisitions of Pigozzi S.A. and Winner Hydraulics, which is expected to
close late in the first quarter. As a result, Eaton anticipates overall growth
in sales in the range of 12 to 14% in 2005. The Company's guidance for net
income per Common Share for the full year of 2005 is $4.90 to $5.10, after
restructuring charges of $.20 per share. For the first quarter of 2005, Eaton
anticipates net income per share to be $1.10 to $1.20, after restructuring
charges of $.05 per share.
F-49
<PAGE>
In Fluid Power, Eaton anticipates that growth in the mobile equipment markets
will continue in 2005, although at more modest levels than in 2004, while growth
in the industrial markets will accelerate. The commercial aerospace market grew
in the fourth quarter of 2004 at its fastest rate in over two years and the
Company believes growth in commercial aerospace is likely to improve further in
2005. Electrical's end markets grew 4% in 2004, and Eaton expects these markets
to grow at about the same rate in 2005. In Automotive, the Company anticipates
slightly weaker markets for both NAFTA and European automotive production in
2005 than in 2004. For Truck, the Company believes demand will remain strong
throughout 2005. For all of 2005, Eaton believes that the NAFTA heavy-duty truck
market is likely to total 310,000 units.
FORWARD-LOOKING STATEMENTS
- --------------------------
This Annual Report to Shareholders contains forward-looking statements
concerning Eaton's first quarter 2005 and full year 2005 net income per share,
worldwide markets, growth in relation to end markets, the anticipated closing of
a new acquisition, growth from acquisitions of businesses and joint ventures,
results of newly awarded contracts, and the repurchase of Common Shares. These
statements should be used with caution and are subject to various risks and
uncertainties, many of which are outside the Company's control. The following
factors could cause actual results to differ materially from those in the
forward-looking statements: unanticipated changes in the markets for the
Company's business segments; unanticipated downturns in business relationships
with customers or their purchases from the Company; competitive pressures on
sales and pricing; increases in the cost of material and other production costs,
or unexpected costs that cannot be recouped in product pricing; the introduction
of competing technologies; unexpected technical or marketing difficulties;
unexpected claims, charges, litigation or dispute resolutions; acquisitions and
divestitures; failure to close, or delay in the closing of, acquisitions;
unanticipated difficulties integrating acquisitions; new laws and governmental
regulations; interest rate changes; stock market fluctuations; and unanticipated
deterioration of economic and financial conditions in the United States and
around the world. Eaton does not assume any obligation to update these
forward-looking statements.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Eaton's management to make
estimates and use assumptions in certain circumstances that affect amounts
reported in the accompanying consolidated financial statements. In preparing
these financial statements, management has made their best estimates and
judgments of certain amounts included in the financial statements, giving due
consideration to materiality. For any estimate or assumption there may be other
reasonable estimates or assumptions that could have been used. However, the
Company believes that given the current facts and circumstances, it is unlikely
that applying such other estimates and assumptions would have caused materially
different amounts to have been reported. Application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from estimates used.
F-50
<PAGE>
Revenue Recognition
- -------------------
Substantially all revenues are recognized when products are shipped to
unaffiliated customers and title has transferred. Other revenues for service
contracts are recognized as the service is provided.
Impairment of Long-Lived Assets
- -------------------------------
Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other
Intangible Assets" provides that goodwill and indefinite life intangible assets
must be reviewed for impairment, in accordance with the specified methodology.
Further, goodwill, intangible and other long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Goodwill and other intangible assets totaled $3.1
billion at the end of 2004 and represented 34% of total assets. These assets
resulted primarily from the $1.1 billion acquisition of the electrical
distribution and controls business unit of Westinghouse in 1994, and the $1.6
billion acquisition of Aeroquip-Vickers in 1999. Eaton completed the annual
impairment tests for goodwill and indefinite life intangible assets as required
by SFAS No. 142. These tests confirmed that the fair value of the Company's
reporting units and indefinite life intangible assets exceed their respective
carrying values and that no impairment loss was required to be recognized. These
businesses have a long history of operating success and profitability and hold
leading market positions in the majority of their product lines. Their products
are not subject to rapid technological or functional obsolescence. This, coupled
with continuous strong product demand support the book values of the goodwill
and intangible assets related to these businesses.
Deferred Income Tax Assets & Liabilities
- ----------------------------------------
Deferred income tax assets and liabilities have been recorded for the
differences between the financial accounting and income tax basis of assets and
liabilities, and for certain United States income tax credit carryforwards.
Recorded deferred income tax assets and liabilities are described in detail in
"Income Taxes" in the Notes to the Consolidated Financial Statements.
Significant factors considered by management in the determination of the
probability of the realization of deferred tax assets include historical
operating results, expectations of future earnings and taxable income, and the
extended period of time over which other postretirement health care liabilities
will be paid. Management believes there is a low probability of the realization
of deferred tax assets related to tax loss carryforwards at certain
international operations and United States state and local income tax loss
carryforwards. Therefore, a valuation allowance of $132 has been recognized for
the full value of these deferred tax assets.
On October 22, 2004, the American Jobs Creation Act of 2004 (the Act) was signed
into law. The Act provides for a special one-time tax deduction of 85% of
certain foreign earnings that are repatriated (as defined in the Act) in 2005.
Eaton has not fully evaluated the effects of the repatriation provision and
therefore has not determined if the Act will materially change its foreign
earnings reinvestment plan. A full evaluation of the plan is expected to be
complete by June 30, 2005.
F-51
<PAGE>
Pension & Other Postretirement Benefit Plans
- --------------------------------------------
The measurement of liabilities related to pension plans and other postretirement
benefit plans is based on management's assumptions related to future events
including interest rates, return on pension plan assets, rate of compensation
increases, and health care cost trend rates. Actual pension plan asset
performance will either reduce or increase unamortized pension losses, which
ultimately affects net income.
At the end of 2002, certain key assumptions used to calculate pension and other
postretirement benefit expense were adjusted, including the lowering of the
assumed return on pension plan assets from 9.85% to 8.71% and the discount rate
from 6.56% to 6.53%. At the end of 2003, the assumed return on pension plan
assets was lowered to 8.50% and the discount rate was lowered to 6.11%. The
changes in these assumptions, coupled with the effect of the decline over the
last several years in the market value of equity investments held by Eaton's
pension plans, resulted in increased pretax expense of $63 in 2003 compared to
2002 and increased pretax expense of $31 in 2004 compared to 2003. At the end of
2004, the assumed return on pension plan assets was lowered to 8.41% and the
discount rate was lowered to 5.81%. These changes are expected to result in
increased pension and other postretirement benefit expense of approximately $60
in 2005 over 2004.
Certain key assumptions related to the measurement of pension and other
postretirement benefits were adjusted in 2004 to reflect current economic
conditions. Changes in key assumptions reflected the continued reduction in the
interest rates and an increase in the medical trend assumption in accordance
with Eaton's estimates of future medical costs. A 1-percentage point change in
the assumed rate of return on pension plan assets is estimated to have
approximately a $20 effect on pension expense. Likewise, a 1-percentage point
change in the discount rate is estimated to have approximately a $36 effect on
pension expense. Information related to changes in key assumptions used to
recognize expense for other postretirement benefit plans is found in "Retirement
Benefit Plans" in the Notes to the Consolidated Financial Statements.
Protection of the Environment
- -----------------------------
Eaton's operations 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 in "Protection of the Environment" in the Notes to
the Consolidated Financial Statements.
Contingencies
- -------------
Eaton is subject to a broad range of claims, administrative proceedings,
and legal proceedings, such as lawsuits that relate to contractual
allegations, patent infringement, personal injuries (including asbes-
tos claims) and employment-related matters. Although it is not pos-
sible to predict with certainty the outcome or cost of these matters,
the Company believes that these matters will not have a material ad-
verse effect on its financial position, results of operations or cash flows.
F-52
<PAGE>
Stock Options Granted to Employees & Directors
- ----------------------------------------------
In December 2004, Statement of Financial Accounting Standards (SFAS) No. 123(R),
"Share-Based Payment" was issued by the Financial Accounting Standards Board.
The Statement eliminates the alternative to use the intrinsic-value-method of
accounting that was provided in SFAS No. 123 as originally issued. The amended
Statement requires entities to recognize the cost of employee and director
services received in exchange for stock options based on the grant date fair
value of those awards, with limited exceptions. That cost will be recognized
over the period during which an employee or director is required to provide
service in exchange for the award. Eaton will begin recognizing expenses related
to stock options in third quarter 2005. As described in "Shareholders' Equity"
in the Notes to the Consolidated Financial Statements, if the Company had
accounted for stock options under the fair-value-based method of expense
recognition in SFAS No. 123, net income per Common Share assuming dilution would
have been reduced by $.08 in 2004, $.08 in 2003 and $.10 in 2002. The Company
estimates that the adoption of SFAS No. 123(R) will reduce net income per Common
Share assuming dilution in the second half of 2005 by $.06.
OFF-BALANCE SHEET ARRANGEMENTS
- ------------------------------
Eaton does not have off-balance sheet arrangements or financings with
unconsolidated entities or other persons. In the ordinary course of business,
the Company leases certain real properties and equipment, as described in "Lease
Commitments" in the Notes to the Consolidated Financial Statements. Transactions
with related parties are in the ordinary course of business, are conducted on an
arm's-length basis, and are not material to Eaton's financial position, results
of operations or cash flows.
MARKET RISK DISCLOSURE & CONTRACTUAL OBLIGATIONS
- ------------------------------------------------
To manage exposure to fluctuations in foreign currencies, interest rates and
commodity prices, Eaton uses straightforward, non-leveraged, financial
instruments for which quoted market prices are readily available from a number
of independent services.
The Company is exposed to various changes in financial market conditions,
including fluctuations in interest rates, foreign currency exchange rates, and
commodity prices. Eaton manages exposure to such risks through normal operating
and financing activities.
Interest rate risk can be measured by calculating the near-term earnings impact
that would result from adverse changes in interest rates. This exposure results
from short-term debt, long-term debt that has been swapped to floating rates,
and money market investments that have not been swapped to fixed rates. A 100
basis point increase in short-term interest rates would increase the Company's
net, pretax interest expense by approximately $3.
Eaton also measures interest rate risk by estimating the net amount by which the
fair value of the Company's financial liabilities would change as a result of
movements in interest rates. Based on a hypothetical, immediate 100 basis point
decrease in interest rates at December 31, 2004, the market value of the
F-53
<PAGE>
Company's debt and interest rate swap portfolio, in aggregate, would increase
by $175.
Foreign currency risk is the risk that Eaton will incur economic losses due to
adverse changes in foreign currency exchange rates. The Company mitigates
foreign currency risk by funding some investments in foreign markets through
local currency financings. Such non-U.S. Dollar debt was $333 at December 31,
2004. To augment Eaton's non-U.S. Dollar debt portfolio, the Company also enters
into forward foreign exchange contracts and foreign currency swaps from time to
time to mitigate the risk of economic loss in its foreign investments due to
adverse changes in exchange rates. At December 31, 2004, the aggregate balance
of such contracts was $120. Eaton also monitors exposure to transactions
denominated in currencies other than the functional currency of each country in
which the Company operates, and periodically enters into forward contracts to
mitigate that exposure. In the aggregate, Eaton's portfolio of forward contracts
related to such transactions was not material to its financial position, results
of operations or cash flows during 2004.
Other than the above noted debt and financial derivative arrangements, there
were no material derivative instrument transactions in place or undertaken
during 2004.
A summary of contractual obligations as of December 31, 2004 follows:
<TABLE>
<CAPTION>
Payments due by period
------------------------------------
2006 2008
to to After
2005 2007 2009 2009 Total
---- ---- ---- ------ ------
<S> <C> <C> <C> <C> <C>
Long-term debt $ 26 $568 $ 19 $1,147 $1,760
Operating leases 97 122 53 33 305
Purchase obligations 298 53 33 15 399
Other long-term liabilities 105 23 23 32 183
---- ---- ---- ------ ------
$526 $766 $128 $1,227 $2,647
==== ==== ==== ====== ======
</TABLE>
Long-term debt includes obligations under capital leases that are not material.
Purchase obligations are entered into with various vendors in the normal course
of business. These amounts include commitments for purchases of raw materials,
outstanding non-cancelable purchase orders, releases under blanket purchase
orders and commitments under ongoing service arrangements. Other long-term
liabilities include $95 of contributions to pension plans in 2005 and $88 of
deferred compensation earned under various plans for which the participants have
elected to receive disbursement at a later date. The table above does not
include future expected pension benefit payments or expected other
postretirement benefit payments for each of the next five years and the five
years thereafter. Information related to the amounts of these future payments is
found in "Retirement Benefit Plans" in the Notes to the Consolidated Financial
Statements.
F-54
<PAGE>
RESULTS OF OPERATIONS - 2003 COMPARED TO 2002
- ---------------------------------------------
<TABLE>
<CAPTION>
2003 2002 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $8,061 $7,209 12%
Operating profit 797 651 22%
Operating margin 9.9% 9.0%
Net income 386 281 37%
Net income per Common Share
assuming dilution $ 2.56 $ 1.96 31%
</TABLE>
Sales for 2003 rose to $8,061, 12% over 2002. Sales growth of 12% in 2003
consisted of 6% from recent business acquisitions, net of the effect of the sale
of Navy Controls in July 2002, 3% from higher foreign exchange rates, and 3%
from organic growth. Eaton outperformed its end markets, as the Company
estimated that its overall end markets declined 2% in 2003 compared to 2002.
Growth reflected increased sales resulting from acquisitions of businesses,
which added approximately $500 of sales in 2003.
Increased operating profit in 2003 was primarily due to higher sales, the
benefits of restructuring actions taken in recent years and lower restructuring
charges in 2003. Operating margins were reduced due to restructuring charges by
..4% in 2003 and .8% in 2002. The operating results of each business segment are
further discussed below, under "Results by Business Segment".
The increase in net income was primarily due to higher sales in 2003 and the
benefits of restructuring actions taken in 2003 and prior years.
RESULTS BY GEOGRAPHIC REGION
- ----------------------------
<TABLE>
<CAPTION>
Operating
Net sales Operating profit margin
-------------------------- ----------------------- -----------
2003 2002 Increase 2003 2002 Increase 2003 2002
------ ------ -------- ---- ----- -------- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
United States $5,758 $5,605 3% $546 $483 13% 9.5% 8.6%
Canada 209 185 13% 28 15 87% 13.4% 8.1%
Europe 1,581 1,110 42% 94 65 45% 6.0% 5.9%
Latin America 516 403 28% 65 45 44% 12.6% 11.2%
Asia/Pacific 504 358 41% 64 43 49% 12.7% 12.0%
Eliminations (507) (452)
------ ------ ---- ----
$8,061 $7,209 12% $797* $651* 22% 9.9% 9.0%
====== ====== ==== ====
</TABLE>
* A reconciliation of operating profit to net income is included in "Business
Segment Information" in the Notes to the Consolidated Financial Statements.
Sales in the United States rose primarily due to the acquisition of the Boston
Weatherhead fluid power business in fourth quarter 2002, partially offset by the
sale of the Navy Controls business in second half 2002. Higher operating profit
F-55
<PAGE>
in the United States primarily resulted from increased sales, the benefits of
restructuring actions taken in recent years, lower restructuring charges in
2003, and modest profits from the Boston Weatherhead fluid power business
acquired in late 2002. In Canada, the growth in sales and operating profit were
substantially related to foreign exchange rates and the strong performance of
Electrical. Sales in Europe rose primarily due to the acquisition of the Delta
electrical business, the improved performance of Eaton's other business
segments, and foreign exchange rates. Higher operating profit in Europe
primarily resulted from increased sales and the benefits of restructuring
actions taken in recent years. The growth in sales and operating profit in Latin
America was primarily due to recent wins by Fluid Power of new
automotive-related production contracts and the strong performance of Truck.
Sales and operating profit rose in Asia/Pacific due to the acquisition of the
Delta electrical business and the strong performance of all of the Company's
business segments.
As a result of actions taken in 2003 and earlier years to restructure operations
and integrate acquired businesses, Eaton incurred restructuring charges in 2003
of $.16 per Common Share, compared to similar charges in 2002 of $.29 per share.
The Company's results in 2003 were aided by the results of these actions, which
delivered an additional $26 of savings in 2003 that were over and above $130 of
savings delivered in 2002. Additionally, $15 in synergies were achieved through
integration of acquired businesses. These savings, coupled with higher sales in
2003, lower net interest expense and a reduction in the effective income tax
rate, helped the Company to post significantly higher net income. These
increases in net income were partially offset by additional pension expense and
other postretirement benefit expense in 2003, which reduced net income by $.27
per share compared to 2002. The Company reported no gains on the sales of
businesses in 2003 compared to a gain of $.09 per share in 2002. The sale of 7.4
million shares in June 2003 reduced net income per share by approximately $.06
in 2003.
In 2003, Eaton incurred restructuring charges related to the integration of the
electrical division of Delta plc, acquired in January 2003 and the Boston
Weatherhead fluid power business, acquired in November 2002. In 2002, the
Company incurred restructuring charges to reduce operating costs across its
business segments and certain corporate functions. The charges in 2002 were
primarily a continuation of restructuring programs initiated in 2001. A summary
of these charges follows:
<TABLE>
<CAPTION>
2003 2002
---- ----
<S> <C> <C>
Fluid Power $ 14 $ 26
Electrical 22 16
Automotive 1
Truck 16
---- ----
36 59
Corporate 1 3
---- ----
Pretax charges $ 37 $ 62
==== ====
After-tax charges $ 24 $ 41
Per Common Share $.16 $.29
</TABLE>
F-56
<PAGE>
Restructuring charges in 2003 included $23 for the United States, $11 for Europe
and $3 for Asia/Pacific. Restructuring charges in 2002 included $52 for the
United States and $10 for Europe. The restructuring charges were included in the
Statements of Consolidated Income in Cost of products sold or Selling &
administrative expense, as appropriate. In Business Segment Information, the
charges reduced Operating profit of the related business segment or were
included in Other corporate expense-net, as appropriate.
Pretax income for 2003 was reduced by $63 ($41 after-tax, or $.27 per Common
Share) compared to 2002 due to increased pension and other postretirement
benefit expense in 2003. This resulted from the decline over the last several
years in the market value of equity investments held by Eaton's pension plans,
coupled with the effect of the lowering of discount rates associated with
pension and other postretirement benefit liabilities at year-end 2002.
In July 2002, the Navy Controls business was sold resulting in a pretax gain of
$18 ($13 after-tax, or $.09 per Common Share). The net gain was reported as a
separate line item in the Statements of Consolidated Income and Business Segment
Information.
The change of $37 in Other (income) expense-net for 2003 compared to 2002 was
primarily due to a gain of $3 in foreign exchange in 2003 versus a loss of $8 in
2002, a charge of $10 in 2002 for the contribution to the Eaton Charitable Fund,
and various other items including $11 of reduced legal expenses and favorable
legal settlements in 2003. The charge of $10 for the contribution to the Eaton
Charitable Fund ($6 after-tax, or $.04 per Common Share) was recorded in the
third quarter of 2002.
The effective income tax rate for 2003 was 24.0% compared to 29.5% for 2002. The
lower rate in 2003 reflects many factors, including higher earnings in
international tax jurisdictions with lower income tax rates and increased use of
international tax credit carryforwards. The change in the effective income tax
rates in 2003 compared to 2002 is further explained in "Income Taxes" in the
Notes to the Consolidated Financial Statements.
RESULTS BY BUSINESS SEGMENT
- ---------------------------
Fluid Power
- -----------
<TABLE>
<CAPTION>
2003 2002 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $2,786 $2,456 13%
Operating profit 247 187 32%
Operating margin 8.9% 7.6%
</TABLE>
Sales for Fluid Power, Eaton's largest business segment, were a new record.
Sales increased by 13% with 6% from business acquisitions, 4% from foreign
exchange rates and 3% from existing product lines. This compares to a decline of
2% in Fluid Power's markets, with North American fluid power industry shipments
down 3%, commercial aerospace markets off 12%, and defense aerospace markets up
by 13%. The traditional mobile and industrial hydraulics markets began to
recover in fourth quarter 2003, reflecting the pickup in capital goods
expenditures.
F-57
<PAGE>
In 2003, Fluid Power's results were positively impacted by the full year results
of two businesses acquired late in 2002. The Boston Weatherhead fluid power
business was purchased in the fourth quarter of 2002. This business, which had
2002 sales of $211, manufactures hose, tubing, and fluid connectors for fluid
power systems primarily for the industrial distribution, mobile off-highway and
heavy-duty truck markets. In addition, the aerospace circuit breaker business of
Mechanical Products was purchased during that same quarter. This business had
annual sales of $12 in 2001.
Operating profit in 2003 was a new record and increased primarily due to higher
sales in 2003, the benefits of restructuring actions taken in recent years to
resize this business, and reduced restructuring charges in 2003. Restructuring
charges in 2003, which primarily related to the acquisition of the Boston
Weatherhead business, were $14 compared to $26 in 2002. Restructuring charges
reduced operating margins by .5% in 2003 and 1.1% in 2002.
Electrical
- ----------
<TABLE>
<CAPTION>
2003 2002 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $2,313 $1,993 16%
Operating profit 158 149 6%
Operating margin 6.8% 7.5%
</TABLE>
In Electrical, sales growth in 2003 was primarily the result of business
acquisitions. Sales increased by 15% due to the acquisitions in January 2003 of
the electrical division of Delta plc and the power systems business of
Commonwealth Sprague Capacitor, as well as the new business formed with
Caterpillar Inc. in August 2003, net of the effect of the sale of the Navy
Controls business in July 2002. Sales in 2003 were up 1% from organic growth.
End markets for the electrical business remained weak during 2003, with an
estimated 2% decline in the markets for this business compared to 2002.
In 2003, Electrical added three key businesses. On January 31st, the electrical
division of Delta plc was acquired. This business, which had sales of $326 in
2002, includes major electrical brands such as MEM(R), Holec(TM), Bill(TM), Home
Automation(TM), Elek(TM) and Tabula(TM). The Delta business represents a
significant addition to the capabilities and geographic footprint of Electrical.
Also, in January the power systems business of Commonwealth Sprague Capacitor,
which had annual sales of $6 in 2002, was acquired. In August, a new business
was formed with Caterpillar Inc. to provide switchgear products under the Cat(R)
brand name. The business operates under the name Intelligent Switchgear
Organization LLC and is 51%-owned by Eaton.
Increased operating profit in 2003 was primarily due to the benefits of
restructuring actions taken in recent years to resize this business, partially
offset by increased restructuring charges in 2003. Restructuring charges in
2003, which related to the acquisition of the Delta electrical division, were
$22 compared to $16 in 2002. Restructuring charges reduced operating margins by
1.0% in 2003 and .8% in 2002. The profitability of the base electrical business
improved significantly during 2003, as operating margins for this business in
the second half of 2003 were 7.6%, after reflecting a 1.3% reduction due to the
acquisition of the Delta electrical division and the new business with
F-58
<PAGE>
Caterpillar Inc., and a 1.2% reduction due to restructuring charges.
Automotive
- ----------
<TABLE>
<CAPTION>
2003 2002 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $1,690 $1,594 6%
Operating profit 224 225 --
Operating margin 13.3% 14.1%
</TABLE>
Sales in Automotive were a new record and considerably outpaced its end markets
in 2003. The increase in sales reflected several new program launches, the
continued strong performance of the North American and European automobile
markets and higher foreign exchange rates. NAFTA light vehicle production
declined 3% to 15.9 million units in 2003 and European production declined 1% to
16.3 million units, compared to 2002.
Operating margin in 2003 was lower than 2002 primarily due to increased costs
related to new product launches and several facility relocations.
Truck
- -----
<TABLE>
<CAPTION>
2003 2002 Increase
------ ------ --------
<S> <C> <C> <C>
Net sales $1,272 $1,166 9%
Operating profit 168 90 87%
Operating margin 13.2% 7.7%
</TABLE>
Sales growth of Truck reflected higher sales in Latin America, Asia/Pacific and
in the aftermarket in North America. NAFTA heavy-duty production was down 2% in
2003 to 177,000 units compared to 2002, and NAFTA medium-duty production was
flat. European medium-duty production was down 7% and Brazilian vehicle
production was flat.
Increased operating profit in 2003 was primarily due to increased sales in 2003
and the benefits of restructuring actions taken in recent years to resize this
business. No restructuring charges were incurred in 2003 compared to $16 in
2002. Operating profit in 2002 was reduced by 1.4% due to restructuring charges.
Corporate
- ---------
Net interest expense of $87 in 2003 fell by $17 from $104 in 2002. The decrease
was primarily related to the reduction in debt of $487 from the end of 2001 to
the end of 2003, the conversion of fixed rate debt to floating rate debt through
interest rate swaps, and a slight reduction of floating interest rates in 2003.
Pension and other postretirement benefit expense included in corporate increased
by $52 in 2003. This primarily resulted from the decline over the last several
years in the market value of equity investments held by Eaton's pension plans,
coupled with the effect of the lowering of discount rates associated with
F-59
<PAGE>
pension and other postretirement benefit liabilities at year-end 2002.
Corporate expense-net in 2003 was $117 compared to $129 for 2002. The decrease
was primarily the result of various items including $11 of reduced legal
expenses and favorable legal settlements in 2003.
F-60
<PAGE>
QUARTERLY DATA
- --------------
(Unaudited)
<TABLE>
<CAPTION>
Quarter ended in 2004 Quarter ended in 2003
-------------------------------------- --------------------------------------
(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>
Net sales $2,633 $2,543 $2,403 $2,238 $2,083 $2,026 $2,027 $1,925
Gross margin 734 707 677 617 578 547 529 510
Percent of net sales 28% 28% 28% 28% 28% 27% 26% 26%
Income before income taxes 194 211 203 173 145 142 122 99
Net income 183 170 161 134 114 107 93 72
Net income per Common Share
- ---------------------------
Assuming dilution $ 1.16 $ 1.09 $ 1.03 $ .85 $ .72 $ .69 $ .64 $ .50
Basic 1.19 1.12 1.06 .87 .74 .70 .64 .51
Cash dividends paid per Common Share $ .27 $ .27 $ .27 $ .27 $ .24 $ .24 $ .22 $ .22
Market price per Common Share
- -----------------------------
High $72.64 $65.88 $64.84 $62.13 $54.70 $47.72 $42.60 $40.50
Low 59.49 59.20 54.23 52.74 44.58 38.74 34.70 33.01
</TABLE>
F-61
<PAGE>
NINE-YEAR CONSOLIDATED FINANCIAL SUMMARY
- ----------------------------------------
<TABLE>
<CAPTION>
(Millions except for per share data) 2004 2003 2002 2001 2000 1999 1998 1997 1996
------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Continuing operations
- ---------------------
Net sales $9,817 $8,061 $7,209 $7,299 $8,309 $8,005 $6,358 $7,104 $6,515
Income before income taxes 781 508 399 278 552 943 616 730 428
Income after income taxes 648 386 281 169 363 603 430 526 305
Percent of net sales 6.6% 4.8% 3.9% 2.3% 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 $ 648 $ 386 $ 281 $ 169 $ 453 $ 617 $ 349 $ 410 $ 349
====== ====== ====== ====== ====== ====== ====== ====== ======
Net income per Common Share
assuming dilution
- ---------------------------
Continuing operations $ 4.13 $ 2.56 $ 1.96 $ 1.20 $ 2.50 $ 4.08 $ 2.96 $ 3.36 $ 1.94
Extraordinary item (.35)
Discontinued operations .62 .10 (.56) (.39) .29
------ ------ ------ ------ ------ ------ ------ ------ ------
$ 4.13 $ 2.56 $ 1.96 $ 1.20 $ 3.12 $ 4.18 $ 2.40 $ 2.62 $ 2.23
====== ====== ====== ====== ====== ====== ====== ====== ======
Average number of Common Shares
outstanding assuming dilution 157.1 150.5 143.4 141.0 145.2 147.4 145.4 156.4 156.4
Net income per Common Share basic
- ---------------------------------
Continuing operations $ 4.24 $ 2.61 $ 1.99 $ 1.22 $ 2.53 $ 4.16 $ 3.01 $ 3.42 $ 1.96
Extraordinary item (.35)
Discontinued operations .63 .10 (.56) (.40) .29
------ ------ ------ ------ ------ ------ ------ ------ ------
$ 4.24 $ 2.61 $ 1.99 $ 1.22 $ 3.16 $ 4.26 $ 2.45 $ 2.67 $ 2.25
====== ====== ====== ====== ====== ====== ====== ====== ======
Average number of Common Shares
outstanding basic 153.1 147.9 141.2 138.8 143.6 145.0 142.8 153.6 154.8
Cash dividends paid per
Common Share $ 1.08 $ .92 $ .88 $ .88 $ .88 $ .88 $ .88 $ .86 $ .80
</TABLE>
F-62
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total assets $9,075 $8,223 $7,138 $7,646 $8,180 $8,342 $5,570 $5,497 $5,290
Long-term debt 1,734 1,651 1,887 2,252 2,447 1,915 1,191 1,272 1,062
Total debt 1,773 1,953 2,088 2,440 3,004 2,885 1,524 1,376 1,092
Shareholders' equity 3,606 3,117 2,302 2,475 2,410 2,624 2,057 2,071 2,160
Shareholders' equity per Common Share $23.52 $20.37 $16.30 $17.80 $17.64 $17.72 $14.34 $13.86 $14.00
Common Shares outstanding 153.3 153.0 141.2 139.0 136.6 148.0 143.4 149.4 154.2
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Common Shares outstanding and all per share data have been restated to give
effect to the two-for-one stock split effective February 23, 2004.
F-63
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Exhibit Index
Exhibits
3(a) Amended Articles of Incorporation (amended and restated as of April
27, 1994) - Incorporated by reference to the Form 10-K for the year
ended December 31, 2002
3(b) Amended Regulations (amended and restated as of April 26, 2000) -
Incorporated by reference to the 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) Rights Agreement (Dated as of June 28, 1995) - Incorporated by
reference to Registration Statement 333-74355 filed on March 12, 1999
10 Material contracts - Each of the following is either a management
contract or a compensatory plan or arrangement:
(a) Deferred Incentive Compensation Plan (amended and restated as of
March 31, 2000) - Incorporated by reference to the Form 10-K for
the year ended December 31, 2000
(b) Executive Strategic Incentive Plan I (Amended and Restated as of
January 1, 2001) - Incorporated by reference to the Form 10-K for
the year ended December 31, 2002
(c) Group Replacement Insurance Plan (GRIP), effective as of June 1,
1992 - Incorporated by reference to the Form 10-K for the year
ended December 31, 1992
(d) 1991 Stock Option Plan - Incorporated by reference to the Form
10-K for the year ended December 31, 2002
(e) 1995 Stock Plan - Incorporated by reference to the Form 10-K for
the year ended December 31, 2002
(f) Incentive Compensation Deferral Plan (amended and restated as of
October 1, 1997) - Incorporated by reference to the Form 10-K for
the year ended December 31, 2000
(g) Form of Change of Control Agreement entered into with officers of
Eaton Corporation - Incorporated by reference to the Form 10-K
for the year ended December 31, 2002
(h) Form of Indemnification Agreement entered into with officers of
Eaton Corporation - Incorporated by reference to the Form 10-K
for the year ended December 31, 2002
(i) Limited Eaton Service Supplemental Retirement Income Plan
<PAGE>
(amended and restated as of January 1, 2003) - Incorporated by
reference to the Form 10-K for the year ended December 31, 2002
(j) Supplemental Benefits Plan (amended and restated as of January 1,
1989) (which provides supplemental retirement benefits) -
Incorporated by reference to the Form 10-K for the year ended
December 31, 2002
(k) Excess Benefits Plan (Amended and Restated Effective January 1,
1989) (with respect to Section 415 limitations of the Internal
Revenue Code) - Incorporated by reference to the Form 10-K for
the year ended December 31, 2002
(l) Executive Incentive Compensation Plan (Effective as of January 1,
2003) - Incorporated by reference to the Form 10-K for the year
ended December 31, 2003
(m) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1985 and amended effective as of September 24, 1996,
January 28, 1998, January 23, 2002 and February 24, 2004) -
Incorporated by reference to the Form 10-Q for the three months
ended March 31, 2004
(n) Plan for the Deferred Payment of Directors' Fees (Originally
adopted in 1980 and amended and restated in 1989 and 1996) -
Incorporated by reference to the Form 10-K for the year ended
December 31, 2002
(o) 1996 Non-Employee Director Fee Deferral Plan (amended and
restated as of October 22, 2002) - Incorporated by reference to
the Form 10-K for the year ended December 31, 2002
(p) Trust Agreement - Outside Directors (dated December 6, 1996) -
Incorporated by reference to the Form 10-K for the year ended
December 31, 2002
(q) Trust Agreement - Officers and Employees (dated December 6, 1996)
- Incorporated by reference to the Form 10-K for the year ended
December 31, 2002
(r) 1998 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 13, 1998
(s) 2002 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 15, 2002
(t) Executive Strategic Incentive Plan II (Effective as of January 1,
2001) - Incorporated by reference to the Form 10-K for the year
ended December 31, 2002
(u) Vehicle Allowance Program (Effective as of January 1, 2003) -
Incorporated by reference to the Form 10-K for the year ended
December 31, 2003
(v) 2004 Stock Plan - Incorporated by reference to the definitive
Proxy Statement dated March 19, 2004
(w) 2005 Non-Employee Director Fee Deferral Plan (Effective January
1, 2005) - Filed in conjunction with this Form 10-K
<PAGE>
(x) Deferred Incentive Compensation Plan II (Effective January 1,
2005) - Filed in conjunction with this Form 10-K
(y) Incentive Compensation Deferral Plan II (Effective January 1,
2005) - Filed in conjunction with this Form 10-K
(z) Supplemental Benefits Plan II (Effective January 1, 2005) - Filed
in conjunction with this Form 10-K
(aa) Excess Benefits Plan II (Effective January 1, 2005) - Filed in
conjunction with this Form 10-K
(bb) Limited Eaton Service Supplemental Retirement Income Plan II
(Effective January 1, 2005) - Filed in conjunction with this Form
10-K
(cc) Amendment to the Plan (originally adopted in 1985) for the
Deferred Payment of Directors' Fees (Effective January 1, 2005) -
Filed in conjunction with this Form 10-K
(dd) Form of Stock Option Agreement for Non-Employee Directors - Filed
in conjunction with this Form 10-K
(ee) Form of Stock Option Agreement for Executives - Filed in
conjunction with this Form 10-K
(ff) Form of Restricted Share Award Agreement - Filed in conjunction
with this Form 10-K
12 Ratio of Earnings to Fixed Charges - Filed in conjunction with this
Form 10-K
14 Code of Ethics - Incorporated by reference to the definitive Proxy
Statement to be filed on or about March 18, 2005
21 Subsidiaries of Eaton Corporation - Filed in conjunction with this
Form 10-K
23 Consent of Independent Registered Public Accounting Firm - Filed in
conjunction with this Form 10-K
24 Power of Attorney - Filed in conjunction with this Form 10-K
31.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302) - Filed in conjunction with this Form 10-K
31.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 302) - Filed in conjunction with this Form 10-K
32.1 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906) - Filed in conjunction with this Form 10-K
32.2 Certification of Form 10-K (Pursuant to the Sarbanes-Oxley Act of
2002, Section 906) - Filed in conjunction with this Form 10-K
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.W
<SEQUENCE>2
<FILENAME>l12544aexv10ww.txt
<DESCRIPTION>EX-10(W) 2005 NON-EMPLOYEE DIR. FEE DEFERRAL PLAN
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(w)
2005 NON-EMPLOYEE DIRECTOR FEE DEFERRAL PLAN
I. PURPOSE
The 2005 Non-Employee Director Fee Deferral Plan (the "Plan") enables each
Director of Eaton Corporation ("Eaton" or the "Company") who is not employed by
the Company to defer receipt of fees that may be payable to him or her for
future services as a member of the Board of Directors of the Company (the
"Board") or as chairman or as a member of any committee of the Board. The
purpose of the Plan is to help attract and retain highly qualified individuals
to serve as members of the Company's Board of Directors and as members of
committees thereof.
II. ELIGIBILITY
All members of the Board who are not employed by the Company are eligible
to participate in the Plan with respect to amounts earned as fees for services
as a member of the Board or as chairman or a member of any committee of the
Board.
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 Fees and earnings or losses thereon.
Agreement - A written agreement between Eaton and a Participant deferring
the receipt of Fees and indicating the term of the deferral.
Beneficiary - The person or entity designated in writing executed and
delivered by the Participant to the Committee. If that person or entity is not
living or in existence at the time any unpaid balance of Deferred Fees 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 - A change of control as determined in
accordance the provisions of Section 409A of the Code and Treasury Regulations
and published guidance issued pursuant thereto.
<PAGE>
Code - Internal Revenue Code of 1986, as it may be amended from time to
time.
Committee - The Governance Committee of the Board or such other committee
as the Board may from time to time designate for purposes of administration of
the Plan.
Common Share Retirement Deferred Fees - Retirement Deferred Fees that are
converted into share units in accordance with Article VI.
Deferred Fees - That portion of Fees deferred pursuant to the Plan.
Eaton - Eaton Corporation, an Ohio corporation, and its subsidiaries and
successors and assigns.
Eaton Common Shares - The common shares of Eaton Corporation with a par
value of $.50 each.
Fees - Any amount payable to a Participant for services as a member of the
Board or as chairman or a member of any committee of the Board.
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 Account, as determined at the time
initial payments are to be made pursuant to the selections made by the
Participants in accordance with Section 9.02.
Interest Rate Retirement Deferred Fees - Retirement Deferred Fees that are
credited with Treasury Note Based Interest in accordance with Article VI.
Participant - A member of the Board who is not an employee of Eaton and who
elects to defer receipt of Fees.
Periodic Installments - Annual payments, over a period not to exceed
fifteen years, as elected by the Participant in accordance with the terms of the
Plan, which are substantially equal in amount, or, in the case of Common Share
Retirement Deferred Fees, 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
Service as a Director shall be included with each payment.
Plan - This 2005 Non-Employee Director Fee Deferral Plan pursuant to which
Fees may be deferred for later payment, as set forth herein effective January 1,
2005, and adopted December 8, 2004.
Retirement - The Termination of Service as a Director of a Participant who
is age 55 or older and who has at least ten years of service as a member of the
Board or who is age 70 or older.
<PAGE>
Retirement Deferred Fees - That portion of Fees deferred for payment at
Retirement or in Periodic Installments commencing at Retirement, as elected by
the Participant in accordance with Article IV.
Short-Term Deferred Fees - That portion of Fees deferred for payment as
elected by the Participant in accordance with Article V.
Termination and Change in Control - The Termination of Service as a
Director of a Participant for any reason whatsoever prior to a Change in Control
if there is a subsequent Change in Control or the Termination of Service as a
Director of a Participant for any reason whatsoever during the three-year period
immediately following a Change in Control.
Termination of Service as a Director - The time when a Participant shall no
longer be a member of the Board, whether by reason of retirement, death,
voluntary resignation, divestiture, removal (with or without cause), or
disability.
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.
Trustee - The trustee of any trust which holds assets for the payment of
the benefits provided by the Plan.
IV. ELECTION TO DEFER
Section 4.01 Deferral Options. For each calendar year commencing with
----------------
2005, a Participant may elect to defer the receipt of all or part of his or her
Fees as Short-Term Deferred Fees or Retirement Deferred Fees. Once a Participant
has made an effective election, he or she may not thereafter change that
election or change any allocation between Short-Term Deferred Fees or Retirement
Deferred Fees.
Section 4.02 Amount Deferred. Not less than 10% of Fees payable for any
---------------
calendar year may be deferred under the Plan. If a Participant elects to
allocate a portion of Fees to both Short-Term Deferred Fees and Retirement
Deferred Fees, the amount allocated to each shall be not less than 10% of the
Fees payable for any calendar year.
Section 4.03 Election Deadline. To be in effect for a calendar year, a
-----------------
Participant's election must be completed, signed and filed with the Committee on
or before December 31 of the immediately preceding calendar year, except that in
the case of the first year in which a Participant becomes eligible to
participate in the Plan, such election may be made with respect to
<PAGE>
services performed subsequent to the election within 30 days after the date the
Participant becomes eligible to participate in the Plan.
Section 4.04 Additional Terms. At the time the Participant elects to defer
----------------
all or part of his or her Fees for a calendar year as Short-Term Deferred
Compensation, the Participant shall also specify the year in which payment of
such amount shall commence (which shall not be prior to the second year
following the calendar year for which the Fees were deferred) and the method of
payment selected from those permitted under Article V, provided that payment
shall commence on or about March 15 of the specified year. At the time the
Participant elects to defer all or part of his or her Fees for a calendar year
as Retirement Deferred Fees, the Participant shall also specify that payment of
such amounts be made in a lump sum or in Periodic Installments, including the
term of such Periodic Installments, upon Retirement, provided that the date of
payment or commencement shall be on or about March 15 of the year following the
date of such Retirement, subject to the provisions of Section 6.06.
V. SHORT-TERM DEFERRED FEES
If elected by a Participant, payment of the amount of Fees allocated to
Short-Term Deferred Fees will be deferred. Short-Term Deferred Fees 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. Treasury Bill Interest Equivalents shall be
credited quarterly to the Participant's Short-Term Deferred Fees Account until
such compensation is paid to the Participant. Short-Term Deferred Fees, 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
elected by the Participant. Upon the death of a Participant prior to payment of
such amounts, payment shall be made to his or her Beneficiary in a lump sum as
soon as practicable.
VI. RETIREMENT DEFERRED FEES
Section 6.01 Duration. If elected by a Participant, payment of the amount
--------
of Fees allocated to Retirement Deferred Fees will be deferred to Retirement.
Retirement Deferred Fees 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 6.02 Common Share Retirement Deferred Fees. Between 50% and 100%,
-------------------------------------
as elected by the Participant, of the amount allocated to Retirement Deferred
Fees shall be credited to Common Share Retirement Deferred Fees, and the balance
shall be credited to Interest Rate Retirement Deferred Fees.
Common Share Retirement Deferred Fees 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
<PAGE>
immediately preceding the end of the calendar quarter in which the Fees to be
deferred were earned. For purposes of the Plan, "mean price" shall be the mean
of the highest and lowest selling prices for Eaton Common Shares quoted on the
New York Stock Exchange List of Composite Transactions on the relevant trading
day. 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 price for Eaton Common Shares on the dividend
payment date.
Upon payment of Common Share Retirement Deferred Fees 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.
Section 6.03 Interest Rate Retirement Deferred Fees. Retirement Deferred
--------------------------------------
Fees not credited to Common Share Retirement Deferred Fees shall be credited to
Interest Rate Retirement Deferred Fees. Interest Rate Retirement Deferred Fees
shall be credited to the Interest Rate Retirement Deferred Fees Account, which
shall earn Treasury Note Based Interest, compounded quarterly, until paid.
Section 6.04 Periodic Installments. Upon the death of a Participant who
---------------------
has commenced receiving Periodic Installments, the entire remaining amount of
his or her Retirement Deferred Fees shall be distributed to the Participant's
Beneficiary. Such distribution shall be made in a lump sum as soon as
practicable following the death.
Section 6.05 Termination of Service as a Director. The Retirement Deferred
------------------------------------
Fees Account of a Participant whose Termination of Service as a Director occurs
for reasons other than Retirement shall be distributed in a lump sum as soon as
practicable following the Participant's Termination of Service as a Director for
reasons other than Retirement; subject, however, to the limitations set forth in
Section 6.06.
Earnings shall be credited on undistributed Retirement Deferred Fees
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.
Section 6.06 Limitations on Distribution. Notwithstanding any provision of
---------------------------
the Plan to the contrary, Fees deferred under the Plan shall not be distributed
earlier than
(a) separation from service as determined by the Secretary of the Treasury
(except as provided below with respect to a key employee of Eaton);
(b) the date the Participant becomes disabled (within the meaning of
Section 409A(a)(2)(C) of the Code);
(c) death of the Participant;
<PAGE>
(d) a specified time (or pursuant to a fixed schedule) specified under the
Plan at the date of the deferral of such Fees;
(e) to the extent provided by the Secretary of the Treasury, a change in
the ownership or effective control of Eaton, or in the ownership of a
substantial portion of the assets of Eaton; or
(f) the occurrence of an unforeseeable emergency as defined in Section
409A(a)(2)(B)(ii) of the Code.
In the case of any key employee (as defined in Section 416(i) of the Code
without regard to paragraph (5) thereof) of Eaton, distributions may not be made
before the date which is six months after the date of separation from service
(or, if earlier, the date of death of the Participant).
VII. AMENDMENT AND TERMINATION
Section 7.01 Right to Amend or Terminate. 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, upon the occurrence of a Change in Control of Eaton, no amendment,
modification or termination of the Plan shall, without the consent of any
particular Participant, alter or impair any rights or obligations under the Plan
with respect to that Participant.
Section 7.02 American Jobs Creation Act of 2004. The Plan is intended to
----------------------------------
provide for the deferral of compensation in accordance with the provisions of
Section 409A of the Code and Treasury Regulations and published guidance issued
pursuant thereto. Accordingly, the Plan shall be construed in a manner
consistent with those provisions and may at any time be amended in the manner
and to the extent determined necessary or desirable by Eaton to reflect or
otherwise facilitate compliance with such provisions with respect to amounts
deferred on and after January 1, 2005, including as contemplated by Section
885(f) of the American Jobs Creation Act of 2004. Moreover, to the extent
permitted in guidance issued by the Secretary of the Treasury and in accordance
with procedures established by the Committee, a Participant may be permitted to
terminate participation in the Plan or cancel an outstanding deferral election
with regard to amounts deferred after December 31, 2004. Notwithstanding any
provisions of the Plan to the contrary, no otherwise permissible election or
distribution shall be made or given effect under the Plan that would result in
taxation of any amount under Section 409A of the Code.
<PAGE>
VIII. 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.
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 120 days after receipt of the written request.
The determinations of the Committee shall be final and conclusive.
IX. TERMINATION AND CHANGE IN CONTROL
Section 9.01 Termination and Change in Control. Notwithstanding anything
---------------------------------
herein to the contrary other than Section 6.06, 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 9.02.
Section 9.02 Payment Requirement. No later than the date a Participant
-------------------
makes an initial election under the Plan, the Participant shall select one of
the payment alternatives set forth below with respect to that portion of the
Participant's 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:
(a) a Lump Sum Payment within 30 days following the Termination and Change
in Control;
(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 9.02,
commencing within 30 days following the Termination and Change in
Control which are substantially equal in amount or in the number of
share units being valued and paid or in the number of Eaton Common
Shares being distributed, except that earnings attributable to periods
following Termination and Change in Control shall be included with
each payment.
<PAGE>
Payment of such amounts shall be made to each such Participant in accordance
with his or her selected alternative as provided in Section 9.02.
X. MISCELLANEOUS
Section 10.01 Adjustments. In the event of a reorganization, merger,
-----------
consolidation, reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or similar event affecting
shares of the Company, the Committee shall equitably adjust the number of share
units previously allocated to the Accounts of Participants as Common Share
Retirement Deferred Fees.
Section 10.02 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 10.03 Committee Actions. All actions of the Committee hereunder
-----------------
may be taken with or without a meeting, as permitted by law and by the Company's
Amended Regulations.
Section 10.04 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 a
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 the Participant'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 Code and the Employee
Retirement Income Security Act of 1974, as amended.
Section 10.05 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.
<PAGE>
Section 10.06 No Contract for Services. The Plan shall not be deemed to
------------------------
constitute a contract for services between Eaton and a Participant. Neither the
execution of the Plan nor any action taken by Eaton or the Committee pursuant to
the Plan shall confer on a Participant any legal right to be continued as a
member of the Board or in any other capacity with Eaton whatsoever.
Section 10.07 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.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.X
<SEQUENCE>3
<FILENAME>l12544aexv10wx.txt
<DESCRIPTION>EX-10(X) DEFERRED INCENTIVE COM PLAN II
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(x)
EATON CORPORATION
DEFERRED INCENTIVE COMPENSATION PLAN II
I. PURPOSE
-------
The purpose of the Deferred Incentive Compensation Plan II 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, and Treasury Bill 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.
BOARD COMMITTEE: The Compensation and Organization Committee of the Board
of Directors of Eaton.
<PAGE>
CAUSE: For the purposes of the 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 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 the Plan, a "Change in Control
of Eaton" shall be determined in accordance the provisions of Section 409A
of the Code and Treasury Regulations and published guidance issued pursuant
thereto.
CODE: Internal Revenue Code of 1986, as it may be amended from time to
time.
COMMITTEE: The Corporate Compensation Committee 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.
DEFERRED INCENTIVE COMPENSATION: That portion of Incentive Compensation
which has been deferred pursuant to the Plan and any Dividend Equivalents,
Treasury Bill 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.
<PAGE>
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.
EXECUTIVE INCENTIVE COMPENSATION PLAN: An incentive compensation plan
approved (a) by the Board for participation in the Plan and whose
participants are designated by the Board Committee on an annual basis or
(b) by the Committee.
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 9.02.
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;
<PAGE>
(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 II (the "Deferred I.C. Plan"),
Limited Eaton Service Supplemental Retirement Income Plan II (the
"Limited Service Plan"), the Executive Strategic Incentive Plan (the
"ESIP Plan") and the Supplemental Benefit Plan II 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 (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 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;
<PAGE>
(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.
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 not
in excess of five (5) years.
PERIODIC INSTALLMENTS: Equal annual payments over a period not to exceed 15
years, as elected by the Participant in accordance with the terms of the
Plan. Periodic Installments are paid on or about March 15 of each year,
except as otherwise provided herein.
<PAGE>
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 effective January 1, 2005, and adopted December 8, 2004.
RETIREMENT: The Termination of Employment of a Participant (i) who is age
fifty-five (55) or older and who has at least ten (10) years of service
with Eaton; (ii) who is age sixty-five (65) or older; or (iii) who is age
fifty (50) or older and who has at least ten (10) years of service with
Eaton and whose employment is terminated by Eaton action.
RETIREMENT COMPENSATION: That portion of Incentive Compensation deferred
under the Plan for payment to a Participant upon his or her Retirement.
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.
IV. ELECTION TO DEFER
-----------------
Section 4.01. With respect to Incentive Compensation for each Incentive
------------
Year commencing in or after 2005, 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 and the allocation between Periodic
Compensation and Retirement Compensation. At the time such election is made
the Participant shall specify with respect to the deferral for such
Incentive Year the time and form of payment for such amount as follows:
<PAGE>
(a) With respect to any amount allocated to Periodic Compensation, the
Participant shall specify the year (subject to the provisions of
Section 5.02) in which payment of such amount shall be made or
commence in the form of Periodic Installments and the number of years,
not to exceed five (5) over which payment shall be made.
(b) With respect to any amount allocated to Retirement Compensation, the
Participant shall specify whether such amount is to be distributed as
a lump sum or in the form of Periodic Installments over a period of
five (5), ten (10), or fifteen (15) years, subject, however, to the
provisions of Section 4.06.
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 December
31 of the immediately preceding Incentive Year. Moreover, in the case of
the first year in which a Participant becomes eligible to participate in
the Plan, such election shall be made with respect to services performed
subsequent to the election within thirty (30) days after the date the
Participant becomes eligible to participate in the Plan.
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
other than as provided in Section 4.06 or change the allocation between
Periodic Compensation and Retirement Compensation.
Section 4.06. A Participant who has made an effective election under
------------
Section 4.01 with respect to deferral of Retirement Compensation for
payment in a lump sum following Retirement may make a subsequent election
to delay payment or commencement of payment of such amount for a period of
five (5) years from the date such payment would otherwise have been made or
change the form of a payment in accordance with the following provisions,
subject to such administrative rules and procedures as may be established
by the Committee:
(a) the subsequent election shall not take effect until 12 months after
the date on which it is made; and
(b) payment in the form of Periodic Installments over a period of five
years may be elected.
<PAGE>
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 on or about March 15 of the year elected by the
------------
Participant (but not earlier than 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 not more than
five (5) equal annual installments, as elected by the Participant; 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, in a lump sum payment as soon as practicable.
VI. RETIREMENT COMPENSATION
-----------------------
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.
Amounts allocated as 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 will be the payment date of such Incentive
Compensation). The amounts allocated as 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.
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,
<PAGE>
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 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 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
such Retirement or other Termination of Employment or distribution, as
the case may be.
(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 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 or other
distribution, 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 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 (60) day period immediately
preceding the Change in Control of Eaton;
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.
<PAGE>
The additional amount, if any, so determined shall not be converted to
Eaton Common Shares but shall be credited to the Participant's Account on
the date of such determination 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 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, distribution of such
Eaton Common Shares and the additional amount (distributable in cash), if
any, for each Incentive Year shall be made or commence. Upon Retirement
distribution shall be made in accordance with the election made by the
Participant under the terms of the Plan with respect to method of payment,
with distribution made or commencing on or about March 15 of the year
following the date of such Retirement, subject to the provisions of Section
9.03, provided that in the event the Participant has made no election for
an Incentive Year, such amount relating to such Incentive Year shall be
payable in a single sum payment, and provided, further, that in the event
of the Participant's death prior to distribution of his or her entire
Account, the remaining amount shall be distributed to the Participant's
beneficiary in a single sum payment as soon as practicable following the
date of death. In the event of a Participant's Termination of Employment
other than Retirement, such amount shall be paid in a single sum payment as
soon as practicable following the date of such Termination of Employment,
subject to the provisions of Section 9.03.
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
Retirement Compensation determined pursuant to Section 6.04 until such
Retirement 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. There shall be computed and credited
quarterly to the Participant's Account Treasury Bill Interest Equivalents
on all unpaid additional amounts credited pursuant to Section 6.04.
Section 6.07. The Eaton Common Shares credited to the Participant's
-------------
Account in accordance with Section 6.04 (as well as any additional amount
credited to the Participant's Account) 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, if any, there shall be paid all Dividend Equivalents
and Treasury Bill Interest Equivalents credited to the Participant and then
unpaid.
VII. AMENDMENT AND TERMINATION
-------------------------
Section 7.01. Eaton fully expects to continue the Plan but it reserves the
-------------
right, at any time or from time to time, by action of the Board Committee,
to modify or amend the
<PAGE>
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.
Section 7.02. The Plan is intended to provide for the deferral of
-------------
compensation in accordance with the provisions of Section 409A of the Code
and Treasury Regulations and published guidance issued pursuant thereto.
Accordingly, the Plan shall be construed in a manner consistent with those
provisions and may at any time be amended in the manner and to the extent
determined necessary or desirable by Eaton to reflect or otherwise
facilitate compliance with such provisions with respect to amounts deferred
on and after January 1, 2005, including as contemplated by Section 855(f)
of the American Jobs Creation Act of 2004. Moreover, to the extent
permitted in guidance issued by the Secretary of the Treasury and in
accordance with procedures established by the Committee, a Participant may
be permitted to terminate participation in the Plan or cancel an
outstanding deferral election with regard to amounts deferred after
December 31, 2004. Notwithstanding any provision of the Plan to the
contrary, no otherwise permissible election or distribution shall be made
or given effect under the Plan that would result in taxation of any amount
under Section 409A of the Code.
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.
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.
-------------
<PAGE>
Notwithstanding anything herein to the contrary other than Section 9.03,
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 9.02.
Section 9.02.
-------------
No later than the date a Participant makes an initial election under the
Plan, a 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:
(a) a lump sum payment within 30 days following the Termination and Change
in Control;
(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 9.02,
commencing within 30 days following the Termination and Change in
Control, 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 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 this Section 9.02.
Section 9.03. Notwithstanding any provision of the Plan to the contrary,
-------------
Compensation deferred under the Plan shall not be distributed earlier than:
(a) separation from service as determined by the Secretary of the Treasury
(except as provided below with respect to a key employee of Eaton);
(b) the date the Participant becomes disabled (within the meaning of
Section 409A(a)(2)(C) of the Code);
(c) death of the Participant;
(d) a specified time (or pursuant to a fixed schedule) specified under the
Plan at the date of the deferral of such Compensation;
(e) to the extent provided by the Secretary of the Treasury, a change in
the ownership or effective control of Eaton, or in the ownership of a
substantial portion of the assets of Eaton; or
<PAGE>
(f) the occurrence of an unforeseeable emergency as defined in Section
409A(a)(2)(B)(ii) of the Code.
In the case of any key employee (as defined in Section 416(i) of the Code
without regard to paragraph (5) thereof) of Eaton, distributions may not be
made before the date which is six months after the date of separation from
service (or, if earlier, the date of death of the Participant).
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 only to the extent Treasury
Regulations permit the exercise of such discretion as permissible within
the restrictions of Section 409A of the Code.
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 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
<PAGE>
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
the 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.
Section 10.09. Obligations incurred by Eaton pursuant to the 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. The 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>
APPROVAL AND ADOPTION
---------------------
The Eaton Corporation Deferred Incentive Compensation Plan II, in the form
attached hereto, is hereby approved and adopted.
/s/ Susan J. Cook Date: December 10, 2004
- -------------------------------------
Name
Vice President- Human Resource
- -------------------------------------
Title
/s/ Earl R. Franklin
- -------------------------------------
Name
Title Vice President andSecretary
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.Y
<SEQUENCE>4
<FILENAME>l12544aexv10wy.txt
<DESCRIPTION>EX-10(Y) EATON INCENTIVE COMP DFRRAL PLAN
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(y)
EATON INCENTIVE COMPENSATION DEFERRAL PLAN II
EFFECTIVE JANUARY 1, 2005
<PAGE>
EATON INCENTIVE COMPENSATION DEFERRAL PLAN II
I. PURPOSE
The Incentive Compensation Deferral Plan II (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 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 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--A Change in Control of Eaton shall be determined in
accordance the provisions of Section 409A of the Code and Treasury Regulations
and published guidance issued pursuant thereto.
Code-- Internal Revenue Code of 1986, as it may be amended from time to time.
<PAGE>
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 VI.
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.
Eaton Common Shares--The common shares of Eaton Corporation with a par value of
50 cents 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 and Organization Committee.
Interest Rate Retirement Compensation--Retirement Compensation which is credited
with Treasury Note Based Interest in accordance with Article VI.
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--Annual payments, over a period not to exceed fifteen
years, as elected by the Participant in accordance with the terms of the Plan,
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. Periodic Installments are paid
on or about March 15 of each year, except as otherwise provided herein.
Plan--This Incentive Compensation Deferral Plan II pursuant to which Incentive
Compensation may be deferred for later payment.
Recruitment Bonus--Any amount offered by the Company in order to recruit new
executives.
Retirement--The Termination of Employment of a Participant (i) who is age
fifty-five or older and who has at least ten years of service with Eaton, (ii)
who is age sixty-five or older, or (iii) who is age fifty or older and who has
at least ten years of service with Eaton and whose employment is terminated by
Eaton action.
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<PAGE>
Retirement Compensation--That portion of Incentive Compensation deferred for
payment at Retirement or in Periodic Installments commencing at Retirement.
Short-Term Compensation--That portion of Incentive Compensation deferred for
payment 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.
IV. ELECTION TO DEFER
Section 4.01 Deferral Options
For each award period ending during or after 2005 (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
December 31, 2004, the Participant may elect to defer the receipt of all or part
of his or her Incentive Compensation as Short-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 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. 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 December 31 of the taxable year
immediately preceding the taxable year in which the services are performed or at
such other time as may be provided in regulations under the Code, except that in
the case of any performance-based compensation based on services performed over
a period of at least 12 months, such election must be made no later than 6
months before the end of the Award Period. Moreover, in the case of the first
year in
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<PAGE>
which a Participant becomes eligible to participate in the Plan, such election
may be made with respect to services performed subsequent to the election within
30 days after the date the Participant becomes eligible to participate in the
Plan. 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
Section 5.01 Amount
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.
Section 5.02 Election and Payment
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 elected by the Participant. At the time a
Participant elects to defer receipt of Incentive Compensation as Short-Term
Compensation pursuant to Section 4.01, the Participant shall also elect with
respect to the deferral for such Award Period the time at which payment of such
amount shall be made or begin and which of the methods of payment described in
this Section 5.02 shall be used, provided that such payment may not be made
prior to March 15 of the second year following the Award Period for which the
Short-Term Compensation was credited to the Participant. Upon the death of a
Participant who has a Short-Term Compensation Account, the entire amount of his
or her Short-Term Compensation then remaining shall be distributed to the
Participant's Beneficiary in a lump sum as soon as practicable following the
death.
VI. RETIREMENT COMPENSATION
Section 6.01 Duration
If elected by a Participant, payment of the amount of Incentive Compensation
allocated to Retirement Compensation will be deferred to Retirement, but subject
to the limitations of Section 9.02. 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. At the time a Participant elects to defer receipt of
Incentive Compensation as Retirement Compensation pursuant to Section 4.01, the
Participant shall also elect with respect to the deferral for such Award Period,
whether such amount is to be distributed in a lump sum or in the form of
Periodic Installments over a period of five (5), ten (10), or fifteen (15)
years, subject, however, to the provisions of Section 6.07. Following a
Participant's Retirement, payment to the Participant shall be made or commence
on or about March 15 of the year following the date of such Retirement, subject
to the provisions of Sections 6.07 and 9.02.
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<PAGE>
Section 6.02 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.
Upon payment of Common Share Retirement Compensation, 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 in the form of Eaton Common
Shares.
Section 6.03 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 6.04 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 distribution shall
be made in a lump sum as soon as practicable following such death.
Section 6.05 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. The lump
sum payment shall be made as soon as practicable following such termination of
employment, subject to the provisions of Section 9.02.
Section 6.06 Earnings
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
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<PAGE>
number of installment payments to be distributed and based on Treasury Note
Based Interest, computed quarterly.
Section 6.07 Limited Redeferral
A Participant who has made an effective election under Section 6.01 with respect
to deferral of Retirement Compensation for payment in a lump sum following
Retirement may make a subsequent election to delay payment or commencement of
payment of such amount for a period of five (5) years from the date such payment
would otherwise have been made or change the form of a payment in accordance
with the following provisions, subject to such administrative rules and
procedures as may be established by the Committee:
(a) the subsequent election shall not take effect until 12 months after
the date on which it is made; and
(b) payment in the form of Periodic Installments over a period of five
years may be elected.
VII. AMENDMENT AND TERMINATION
Section 7.01 Right to Amend or Terminate
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, 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.
Section 7.02 American Jobs Creation Act of 2004
The Plan is intended to provide for the deferral of compensation in accordance
with the provisions of Section 409A of the Code and Treasury Regulations and
published guidance issued pursuant thereto. Accordingly, the Plan shall be
construed in a manner consistent with those provisions and may at any time be
amended in the manner and to the extent determined necessary or desirable by
Eaton to reflect or otherwise facilitate compliance with such provisions with
respect to amounts deferred on and after January 1, 2005, including as
contemplated by Section 885 (f) of the American Jobs Creation Act of 2004.
Moreover, to the extent permitted in guidance issued by the Secretary of the
Treasury and in accordance with procedures established by the Committee, a
Participant may be permitted to terminate participation in the Plan or cancel an
outstanding deferral election with regard to amounts deferred after December 31,
2004. Notwithstanding any provision of the Plan to the contrary, no other
permissible election or distribution shall be made or given effect under the
Plan that would result in taxation of any amount under Section 409A of the Code.
-6-
<PAGE>
VIII. 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.
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.
IX. PAYMENTS
Section 9.01 Automatic Lump Sum Payment
Upon the date of a 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, subject to the provisions of Section
9.02.
Section 9.02 Time of Payment
Notwithstanding any provision of the Plan to the contrary, compensation deferred
under the Plan shall not be distributed earlier than
(a) separation from service as determined by the Secretary of the Treasury
(except as provided below with respect to a key employee of Eaton);
(b) the date the Participant becomes disabled (within the meaning of
Section 409A(a)(2)(C) of the Code);
(c) death of the Participant;
(d) a specified time (or pursuant to a fixed schedule) specified under the
Plan at the date of the deferral of such compensation;
(e) to the extent provided by the Secretary of the Treasury, a change in
the ownership or effective control of Eaton, or in the ownership of a
substantial portion of the assets of Eaton; or
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<PAGE>
(f) the occurrence of an unforeseeable emergency as defined in Section
409A(a)(2)(B)(ii) of the Code.
In the case of any key employee (as defined in Section 416(i) of the Code
without regard to paragraph (5) thereof) of Eaton, distributions may not be made
before the date that is six months after the date of separation from service
(or, if earlier, the date of death of the Participant).
X. MISCELLANEOUS
Section 10.01 Adjustments
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or similar 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 10.02 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 10.03 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 10.04 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
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<PAGE>
regulations under Section 16(b) of the Exchange Act) pursuant to a qualified
domestic relations order, as defined under the Code and the Employee Retirement
Income Security Act.
Section 10.05 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 10.06 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 10.07 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 10.08 Effective Date
The Plan is adopted by the Board on December 8, 2004, effective January 1, 2005.
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<PAGE>
APPROVAL AND ADOPTION
The Eaton Corporation Deferred Incentive Compensation Plan II, in the form
attached hereto, is hereby approved and adopted.
/s/ Susan J. Cook Date: December 10, 2004
- -------------------------------------
Name
Vice President- Human Resource
- -------------------------------------
Title
/s/ Earl R. Franklin
- -------------------------------------
Name
Vice President and Secretary
- -------------------------------------
Title
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</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.Z
<SEQUENCE>5
<FILENAME>l12544aexv10wz.txt
<DESCRIPTION>EX-10(Z) SUPPLEMENTAL BENEFITS PLAN II
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(z)
EATON CORPORATION
SUPPLEMENTAL BENEFITS PLAN II
The Eaton Corporation Supplemental Benefits Plan II, an unfunded,
nonqualified deferred compensation plan adopted December 8, 2004, is set forth
below.
1. Purpose. The purpose of the Supplemental Benefits Plan II is to provide
-------
benefits in excess of the limitations imposed by the Code with respect to
certain employees who participate in the Pension Plan.
2. Definitions. The following definitions are used throughout the Plan:
-----------
(a) "Pension Administration Committee" means the committee comprised of
officers of the Corporation appointed by the Board of Directors from time to
time to administer the Corporation's retirement benefit programs.
(b) "Board of Directors" means the Board of Directors of the Corporation.
(c) "Change in Control" means a change of control of the Corporation
determined in accordance the provisions of Section 409A of the Code and Treasury
Regulations and published guidance issued pursuant thereto.
(d) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
(e) "Committee" means the Compensation and Organization Committee of the
Board of Directors.
(f) "Corporation" means Eaton Corporation, an Ohio corporation.
<PAGE>
(g) "Lump Sum Payment" has the meaning set forth in Section 7(b).
(h) "Participant" means a participant in the Pension Plan who is eligible
to receive benefits under the Plan. The term "Participant" shall include the
beneficiary of a deceased Participant.
(i) "Plan" or "Supplemental Benefits Plan II" means the Eaton Corporation
Supplemental Benefits Plan II as amended from time to time.
(j) "Pension Plan" means the Pension Plan for Eaton Corporation Employees
sponsored by the Corporation, which is a defined benefit plan intended to
qualify under Section 401(a) of the Code, and each other defined benefit plan
sponsored by a subsidiary of the Corporation that is intended to qualify under
Section 401(a) of the Code.
3. Eligibility. An employee of the Corporation who is a participant in the
-----------
Pension Plan and who is "highly compensated" within the meaning of Code Section
401(a)(4) shall be eligible to receive a benefit in an amount determined under
Section 4.
4. Pension Plan Supplemental Benefits. A Participant who is eligible to
----------------------------------
receive a benefit under the Pension Plan shall be entitled to receive a benefit
under the Plan in an amount equal to the difference between (i) and (ii), where:
(i) equals the aggregate amount of monthly income payable to the
Participant under the Pension Plan on the normal benefit commencement date
specified in the Pension Plan as determined under the normal retirement
benefit formula of the Pension Plan before applying any provision reducing
pension benefits because of the provisions of the Code limiting the maximum
amount of an employee's compensation which may be taken into account for
purposes of calculating benefits under the Pension Plan; and
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<PAGE>
(ii) equals the aggregate amount of monthly income determined in
paragraph (i) after applying the provisions of the Code limiting the
maximum amount of an employee's compensation which may be taken into
account for purposes of calculating benefits under the Pension Plan.
Notwithstanding the foregoing, in no event shall the benefit hereunder
duplicate the benefit provided under the Eaton Corporation Excess Benefits Plan,
the Eaton Corporation Excess Benefits Plan II, or the Eaton Corporation
Supplemental Benefits Plan.
5. Vesting. Subject to the rights of general creditors as set forth in
-------
Section 8 and the right of the Corporation to discontinue the Plan as provided
in Section 11(c), a Participant shall have a vested, and nonforfeitable interest
in benefits payable under Section 4 to the same extent and in the same manner as
benefits are vested under the Pension Plan.
6. Commencement of Benefits.
------------------------
(a) The benefit payable to a Participant under Section 4 shall be paid or
shall begin on the first day of the month following the later of his separation
from service (within the meaning of Section 409A of the Code) or the date he is
first eligible for commencement of benefits under the Pension Plan (whether or
not he has applied for commencement of benefits thereunder), except that in the
case of a Participant who is a key employee as defined in Section 416(i) of the
Code and applicable Treasury regulations, payment shall not in any event be made
or begin until the first business day of the month which is at least six months
after the date of his separation from service (or, if earlier, the date of death
of the Participant). If the Participant receives or begins to receive an
actuarially reduced benefit before the normal benefit commencement date under
the Pension Plan, the benefit payable under Section 4 shall also be actuarially
reduced by applying the same actuarial factors that are applied under the
Pension Plan. In the event of the termination of the
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<PAGE>
Pension Plan and the distribution to a Participant of a fully-paid, individual
annuity contract or a single sum payment, payments received under such contract
or the single sum payment shall be deemed to be benefits paid under the Pension
Plan for purposes of the Plan.
7. Form of Benefits.
----------------
(a) The benefit payable under Section 4 shall be paid to the Participant
either in a single sum payment or in a form of annuity available under the terms
of the Pension Plan (which forms of annuity shall be limited to an annuity for
the life of a Participant, a 120-month certain period and life annuity, a joint
and 50% surviving spouse annuity, and a joint and 100% surviving spouse
annuity), as elected by the Participant in accordance with Treasury guidance
pursuant to Section 409A of the Code, provided that in the event no election has
been made with respect to any portion or all of a benefit payable under the
Plan, such benefit shall be paid in a single sum payment. Whether the
Participant elects an optional annuity form of benefit available under the terms
of the Pension Plan or a lump sum benefit, the benefit payable under Section 4
shall be actuarially adjusted by using the same actuarial factors as used under
the Pension Plan for converting the normal form of benefit to an actuarially
equivalent optional benefit. A Participant need not receive the benefit payable
under Section 4 in the same form as the form of benefit elected by the
Participant under the Pension Plan. Notwithstanding the foregoing, prior to
commencement of benefits a Participant may change an election from one available
form of annuity payments to another available form of annuity payments, but only
to the extent permitted in Treasury regulations under Section 409A of the Code.
(b) If the Participant has a vested interest under the Plan and dies prior
to commencement of any benefit under the Plan, the Company will pay a benefit to
the Participant's surviving spouse calculated in accordance with the Plan. The
benefit shall be calculated in the
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<PAGE>
same manner as provided under the Pension Plan. Notwithstanding the foregoing, a
Participant may elect a beneficiary other than his or her spouse (as permitted
under the Pension Plan except that no spousal consent shall be required), with
the benefit amount being determined in the same manner as provided under the
Pension Plan and payable in a lump sum form of payment only.
(c) Upon the date of a Change in Control, the Corporation shall make an
immediate Lump Sum Payment to each Participant.
"Lump Sum Payment" means a single payment in cash to a Participant of his
or her vested benefit determined in accordance with Section 4, actuarially
adjusted by using the same actuarial factors as under the Pension Plan for
converting the normal form of benefit to an actuarially equivalent optional
benefit. These payments would be based upon "final average annual compensation"
and "years of service" as they exist upon the date of the Change in Control, and
would be based upon the assumption (only for purposes of computing this payment)
that the Participant would retire upon that same date (even though the employee
might not otherwise be of retirement age).
Notwithstanding anything herein to the contrary, no Lump Sum Payment shall
be paid to any Participant herein who ceases to be an employee of the
Corporation prior to attaining the age at which he or she is eligible to take
early retirement under the Pension Plan at his or her option.
8. Funding of Benefits.
-------------------
(a) The Plan shall be unfunded. All benefits payable under the Plan shall
be paid from the Corporation's general assets, and nothing contained in the Plan
shall require the Corporation to set aside or hold in trust any funds for the
benefit of a Participant, who shall have the status of a general unsecured
creditor with respect to the Corporation's obligation to make payments under the
Plan. Any funds of the Corporation available to pay benefits under the Plan
shall be subject to
-5-
<PAGE>
the claims of general creditors of the Corporation and may be used for any
purpose by the Corporation.
(b) Notwithstanding the provisions of subsection (a), the Corporation may,
at the direction, and in the absolute discretion, of the Pension Administration
Committee, transfer to the trustee of one or more irrevocable domestic trusts
established in the United States for the benefit of one or more Participants'
assets from which all or a portion of the benefits provided under the Plan will
be satisfied, provided that such assets held in trust shall at all times be
subject to the claims of general unsecured creditors of the Corporation and no
Participant shall at any time have a prior claim to such assets.
9. Administration of the Plan. The Pension Administration Committee shall
--------------------------
administer the Plan and shall keep a written record of its action and
proceedings regarding the Plan and all dates, records and documents relating to
its administration of the Plan. The Pension Administration Committee is
authorized to interpret the Plan, to make, amend and rescind such rules as it
deems necessary for the proper administration of the Plan, to make all other
determinations necessary or advisable for the administration of the Plan and to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan in the manner and to the extent that the Pension Administration Committee
deems desirable to carry the Plan into effect. The powers and duties of the
Pension Administration Committee shall include, without limitation, the
following:
(a) Determining the amount of benefits payable to Participants and
authorizing and directing the Corporation with respect to the payment of
benefits under the Plan;
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<PAGE>
(b) Construing and interpreting the Plan whenever necessary to carry out
its intention and purpose and making and publishing such rules for the
regulation of the Plan as are not inconsistent with the terms of the Plan; and
(c) Compiling and maintaining all records it determines to be necessary,
appropriate or convenient in connection with the administration of the Plan.
No member of the Pension Administration Committee shall vote on any matter
relating specifically to such member. In the event that a majority of the
members of the Pension Administration Committee will be specifically affected by
any action proposed to be taken (as opposed to being affected in the same manner
as each other Participant in the Plan), such action shall be taken by the
Compensation Committee.
10. Claims Procedure.
----------------
(a) If a Participant (hereinafter referred to as the "Applicant") does not
receive the timely payment of the benefits which the Applicant believes are due
under the Plan, the Applicant may make a claim for benefits in the manner
hereinafter provided.
All claims for benefits under the Plan shall be made in writing and shall
be signed by the Applicant. Claims shall be submitted to a representative
designated by the Pension Administration Committee and hereinafter referred to
as the "Claims Coordinator." If the Applicant does not furnish sufficient
information with the claim for the Claims Coordinator to determine the validity
of the claim, the Claims Coordinator shall indicate to the Applicant any
additional information which is necessary for the Claims Coordinator to
determine the validity of the claim.
Each claim hereunder shall be acted on and approved or disapproved by the
Claims Coordinator within 30 days following the receipt by the Claims
Coordinator of the information necessary to process the claim.
-7-
<PAGE>
In the event the Claims Coordinator denies a claim for benefits in whole or
in part, the Claims Coordinator shall notify the Applicant in writing of the
denial of the claim and notify the Applicant of his right to a review of the
Claims Coordinator's decision by the Benefits Committee. Such notice by the
Claims Coordinator shall also set forth, in a manner calculated to be understood
by the Applicant, the specific reason for such denial, the specific provisions
of the Plan on which the denial is based, a description of any additional
material or information necessary to perfect the claim with an explanation of
the Plan's appeals procedure as set forth in this Section.
If no action is taken by the Claims Coordinator on an Applicant's claim
within 30 days after receipt by the Claims Coordinator, such claim shall be
deemed to be denied for purposes of the following appeals procedure.
(b) Any Applicant whose claim for benefits is denied in whole or in part
may appeal for a review of the decision by the Pension Administration Committee.
Such appeal must be made within three months after the Applicant has received
actual or constructive notice of the denial as provided above. An appeal must be
submitted in writing within such period and must:
(i) request a review by the Pension Administration Committee of the
claim for benefits under the Plan;
(ii) set forth all of the grounds upon which the Applicant's request
for review is based on any facts in support thereof; and
(iii) set forth any issues or comments which the Applicant deems
pertinent to the appeal.
The Pension Administration Committee shall regularly review appeals by
Applicants. The Pension Administration Committee shall act upon each appeal
within 30 days after receipt thereof unless special circumstances require an
extension of the time for processing, in which case a
-8-
<PAGE>
decision shall be rendered by the Pension Administration Committee as soon as
possible but not later than 60 days after the appeal is received by the Pension
Administration Committee.
The Pension Administration Committee shall make a full and fair review of
each appeal and any written materials submitted by the Applicant in connection
therewith. The Pension Administration Committee may require the Applicant to
submit such additional facts, documents or other evidence as the Pension
Administration Committee in its discretion deems necessary or advisable in
making its review. The Applicant shall be given the opportunity to review
pertinent documents or materials upon submission of a written request to the
Pension Administration Committee, provided the Pension Administration Committee
finds the requested documents or materials are pertinent to the appeal.
On the basis of its review, the Pension Administration Committee shall make
an independent determination of the Applicant's eligibility for benefits under
the Plan.
In the event the Pension Administration Committee denies an appeal in whole
or in part, the Pension Administration Committee shall give written notice of
the decision to the Applicant, which notice shall set forth, in a manner
calculated to be understood by the Applicant, the specific reasons for such
denial and which shall make specific reference to the pertinent provisions of
the Plan on which the Pension Administration Committee's decision is based.
11. Miscellaneous.
-------------
(a) Nothing in the Plan shall confer upon a Participant the right to
continue in the employ of the Corporation or an affiliate of the Corporation or
shall limit or restrict the right of the Corporation or any affiliate to
terminate the employment of a Participant at any time or without cause.
-9-
<PAGE>
(b) Neither the Corporation nor any Participant hereunder shall assign,
transfer or delegate this Plan or any rights or obligations hereunder except as
expressly provided herein. Without limiting the generality of the foregoing, no
right or interest under this Plan of a Participant shall be assignable or
transferable in any manner or be subject to alienation, anticipation, sale,
pledge, encumbrance or other legal process or in any manner be liable for or
subject to the debts or liabilities of any such Participant. If any Participant
shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge
or otherwise encumber his benefits hereunder or any part thereof, or if by
reason of his bankruptcy or other event happening at any time such benefits
would devolve upon anyone else or would not be enjoyed by him, then the
Corporation, in its discretion, may terminate his interest in any such benefit
to the extent the Corporation considers necessary or advisable to prevent or
limit the effects of such occurrence. Termination shall be effected by filing a
written "termination declaration" with the Plan's records and making reasonable
efforts to deliver a copy to the Participant (the "Terminated Participant")
whose interest is adversely affected.
As long as the Terminated Participant is alive, any benefits affected by
the termination shall be retained by the Corporation and, in the Corporation's
sole and absolute judgment, may be paid to or expended for the benefit of the
terminated Participant, his spouse, his children or any other person or persons
in fact dependent upon him in such a manner as the Corporation shall deem
proper. Upon the death of the Terminated Participant, all benefits withheld from
him and not paid to others in accordance with the preceding sentence shall be
paid to the Terminated Participant's then living descendants, including adopted
children, per stirpes, or, if there are none then living, to his estate.
-----------
-10-
<PAGE>
(c) The Plan may be amended at any time by the Pension Administration
Committee provided such amendment does not have the effect of increasing,
directly or indirectly, the benefit of any Participant. The Plan may also be
amended or terminated by the Board of Directors at any time, and any amendment
adopted by the Board of Directors shall supersede any prior or later amendment
adopted by the Pension Administration Committee that is inconsistent with the
action of the Board of Directors. Subject to the provisions of Section 11(d), no
amendment shall have the effect of impairing or decreasing a Participant's
accrued benefit, including the form of payment thereof. No amendment may amend
or modify the preceding sentence.
(d) The Plan is intended to provide for the deferral of compensation in
accordance with the provisions of Section 409A of the Code and Treasury
Regulations and published guidance issued pursuant thereto. Accordingly, the
Plan shall be construed in a manner consistent with those provisions and may at
any time be amended in the manner and to the extent determined necessary or
desirable by the Corporation to reflect or otherwise facilitate compliance with
such provisions with respect to amounts deferred on or after January 1, 2005,
including as contemplated by Section 885(f) of the American Jobs Creation Act of
2004. Moreover, to the extent permitted in guidance issued by the Secretary of
the Treasury and in accordance with procedures established by the Committee, a
Participant may be permitted to terminate participation in the Plan or cancel an
outstanding deferral election with regard to amounts deferred after December 31,
2004. Notwithstanding any provision of the Plan to the contrary, no otherwise
permissible election or distribution shall be made or given effect under the
Plan that would result in taxation of any amount under Section 409A of the Code.
(e) The Plan is intended to provide benefits for "management or highly
compensated" employees within the meaning of Sections 201, 301 and 401 of the
Employee Retirement Income
-11-
<PAGE>
Security Act of 1974, as amended ("ERISA"), and therefore to be exempt from the
provisions of Parts 2, 3 and 4 of Title I of ERISA. Accordingly, the Plan shall
terminate and no further benefits shall accrue hereunder in the event it is
determined by a court of competent jurisdiction or by an opinion of counsel that
the Plan constitutes an employee pension benefit plan within the meaning of
Section 3(2) of ERISA which is not so exempt.
(f) If any provision in the Plan is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall nevertheless continue to full force and effect without being impaired or
invalidated in any way.
(g) The Plan shall be construed and governed in all respects in accordance
with applicable federal law and, to the extent not preempted by such federal
law, in accordance with the law of the State of Ohio.
APPROVAL AND ADOPTION
---------------------
The Eaton Corporation Supplemental Benefits Plan II, in the form attached
hereto, is hereby approved and adopted.
EATON CORPORATION
/s/ Susan J. Cook Date: December 10, 2004
- -------------------------------------
Name
Vice President- Human Resource
- -------------------------------------
Title
/s/ Earl R. Franklin
- -------------------------------------
Name
Title Vice President and Secretary
- -------------------------------------
Title
-12-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.AA
<SEQUENCE>6
<FILENAME>l12544aexv10waa.txt
<DESCRIPTION>EX-10(AA) EXCESS BENEFITS PLAN II
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(aa)
EATON CORPORATION EXCESS BENEFITS PLAN II
The Eaton Corporation Excess Benefits Plan II, an unfunded, nonqualified
deferred compensation plan adopted December 8, 2004, is set forth below.
1. Purpose. The purpose of the Excess Benefits Plan is to provide benefits
-------
in excess of the limitations under Section 415 of the Code for employees who
participate as salaried participants under a Pension Plan sponsored by the
Corporation or one of its operating subsidiaries.
2. Definitions. The following definitions are used throughout the Plan.
-----------
(a) "Benefits Committee" means the Pension Administration Committee
comprised of corporate officers.
(b) "Board of Directors" means the Board of Directors of the Corporation.
(c) "Change in Control" means a change in control of the Corporation,
determined in accordance the provisions of Section 409A of the Code and Treasury
Regulations and published guidance issued pursuant thereto.
(d) "Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time.
(e) "Committee" means the Compensation and Organization Committee of the
Board of Directors.
(f) "Corporation" means Eaton Corporation, an Ohio corporation.
(g) "Lump Sum Payment" has the meaning set forth in Section 7(b).
<PAGE>
(h) "Participant" means a participant in the Pension Plan who is eligible
to receive benefits under the Plan. The term "Participant" shall include the
beneficiary of a deceased Participant.
(i) "Pension Plan" means the Pension Plan for Eaton Corporation Employees
sponsored by the Corporation, which is a defined benefit plan intended to
qualify under Section 401(a) of the Code, and each other defined benefit plan
sponsored by a subsidiary of the Corporation that is intended to qualify under
section 401(a) of the Code.
(j) "Plan" or "Excess Benefits Plan II" means the Eaton Corporation Excess
Benefits Plan II as amended from time to time.
3. Eligibility. A Participant who is eligible to receive a benefit under
-----------
the Pension Plan shall also be eligible to receive a benefit in an amount
determined under Section 4.
4. Excess Benefits. A Participant who is eligible to receive a benefit
---------------
under the Pension Plan shall be entitled to receive a benefit under the Plan in
an amount equal to the difference between (i) and (ii), where:
(i) equals the aggregate amount of monthly income payable to the
Participant under the Pension Plan on the normal benefit commencement date
specified in the Pension Plan as determined under the normal retirement
benefit formula of the Pension Plan before applying any provision reducing
pension benefits because of the maximum benefit limitations under Section
415 of the Code; and
(ii) equals the aggregate amount of monthly income determined in
paragraph (i) after applying the maximum benefit limitations of Section 415
of the Code.
Notwithstanding the foregoing, in no event shall the benefit hereunder
duplicate, in whole or in part, the benefit provided under the Eaton Corporation
Supplemental Benefits Plan, the Eaton Corporation Supplemental Benefits Plan II,
or the Eaton Corporation Excess Benefits Plan.
-2-
<PAGE>
5. Vesting. Subject to the rights of general creditors as set forth in
-------
Section 8 and the right of the Corporation to discontinue the Plan as provided
in Section 10(c), a Participant shall have a vested and nonforfeitable interest
in the benefit payable under Section 4 to the same extent and in the same manner
as the Participant's benefit is vested under the Pension Plan.
6. Commencement of Benefits. The benefit payable to a Participant under
------------------------
Section 4 shall be paid or shall begin on the first day of the month following
the later of his separation from service (within the meaning of Section 409A of
the Code) or the date he is first eligible for commencement of benefits under
the Pension Plan (whether or not he has applied for commencement of benefits
thereunder), except that in the case of a Participant who is a key employee as
defined in Section 416(i) of the Code and applicable Treasury regulations,
payment shall not in any event be made or begin until the first business day of
the month which is at least six months after the date of his separation from
service (or, if earlier, the date of death of the Participant). If the
Participant receives or begins to receive an actuarially reduced benefit before
the normal benefit commencement date under the Pension Plan, the benefit payable
under Section 4 shall also be actuarially reduced by applying the same actuarial
factors that are applied under the Pension Plan. In the event of the termination
of the Pension Plan and the distribution to a Participant of a fully-paid,
individual annuity contract or a single sum payment, payments received under
such contract or the single sum payment shall be deemed to be benefits paid
under the Pension Plan for purposes of the Plan.
7. Form of Benefits.
----------------
(a) The benefit payable under Section 4 shall be paid to the Participant
either in a single sum payment or in a form of annuity available under the terms
of the Pension Plan (which forms of annuity shall be limited to an annuity for
the life of a Participant, a 120-month certain period and life annuity, a joint
and 50% surviving spouse annuity, and a joint and 100% surviving spouse
-3-
<PAGE>
annuity), as elected by the Participant in accordance with Treasury guidance
pursuant to Section 409A of the Code, provided that in the event no election has
been made with respect to any portion or all of a benefit payable under the
Plan, such benefit shall be paid in a single sum payment. Whether the
Participant elects an optional annuity form of benefit available under the terms
of the Pension Plan or a single sum payment, the benefit payable under Section 4
shall be actuarially adjusted by using the same actuarial factors as used under
the Pension Plan for converting the normal form of benefit to an actuarially
equivalent optional benefit. A Participant need not receive the benefit payable
under Section 4 in the same form as the form of benefit elected by the
Participant under the Pension Plan. Notwithstanding the foregoing, prior to
commencement of benefits a Participant may change an election from one available
form of annuity payments to another form of annuity payments, but only to the
extent permitted in Treasury regulations under Section 409A of the Code.
(b) If the Participant has a vested interest under the Plan and dies prior
to commencement of any benefit under the Plan, the Company will pay a benefit to
the Participant's surviving spouse calculated in accordance with the Plan. This
benefit shall be calculated in the same manner provided under the Pension Plan.
Notwithstanding the foregoing, a Participant may designate a beneficiary other
than his or her spouse (as permitted under the Pension Plan except that no
spousal consent shall be required), with the benefit amount being determined in
the same manner as provided under the Pension Plan and payable in a lump sum
form of payment only.
(c) Upon the date of a Change in Control, the Corporation shall make an
immediate Lump Sum Payment to each Participant.
"Lump Sum Payment" means a single payment in cash to a Participant of his
or her vested benefit determined in accordance with Section 4, actuarially
adjusted by using the same actuarial factors as under the Pension Plan for
converting the normal form of benefit to an actuarially
-4-
<PAGE>
equivalent optional benefit. These payments would be based upon "final average
annual compensation" and "years of service" as they exist upon the date of the
Change in Control, and would be based upon the assumption (only for purposes of
computing this payment) that the employee would retire upon that same date (even
though the Participant might not otherwise be of retirement age).
Notwithstanding anything herein to the contrary, no Lump Sum Payment shall
be paid to any Participant herein who ceases to be an employee of the
Corporation prior to attaining the age at which he or she is eligible to take
early retirement under the Pension Plan at his or her option.
8. Funding of Benefits.
-------------------
(a) The Plan shall be unfunded. All benefits payable under the Plan shall
be paid from the Corporation's general assets, and nothing contained in the Plan
shall require the Corporation to set aside or hold in trust any funds for the
benefit of a Participant, who shall have the status of a general unsecured
creditor with respect to the Corporation's obligation to make payments under the
Plan. Any funds of the Corporation available to pay benefits under the Plan
shall be subject to the claims of general creditors of the Corporation and may
be used for any purpose by the Corporation.
(b) Notwithstanding the provisions of subsection (a), the Corporation may,
at the direction, and in the absolute discretion, of the Benefits Committee,
transfer to the trustee of one or more irrevocable domestic trusts established
in the United States for the benefit of one or more Participants assets from
which all or a portion of the benefits provided under the Plan will be
satisfied, provided that such assets held in trust shall at all times be subject
to the claims of general unsecured creditors of the Corporation and no
Participant shall at any time have a prior claim to such assets.
-5-
<PAGE>
9. Administration of the Plan. The Benefits Committee shall administer the
--------------------------
Plan and shall keep a written record of this action and proceedings regarding
the Plan and all dates, records and documents relating to its administration of
the Plan. The Benefits Committee is authorized to interpret the Plan, to make,
amend and rescind such rules as it deems necessary for the proper administration
of the Plan, to make all other determinations necessary or advisable for the
administration of the Plan and to correct any defect or supply any omission or
reconcile any inconsistency in the Plan in the manner and to the extent that the
Benefits Committee deems desirable to carry the Plan into effect. The powers and
duties of the Benefits Committee shall include, without limitation, the
following:
(a) Determining the amount of benefits payable to Participants and
authorizing and directing the Corporation with respect to the payment of
benefits under the Plan;
(b) Construing and interpreting the Plan whenever necessary to carry out
its intention and purpose and making and publishing such rules for the
regulation of the Plan as are not inconsistent with the terms of the Plan; and
(c) Compiling and maintaining all records it determines to be necessary,
appropriate or convenient in connection with the administration of the Plan.
No member of the Benefits Committee shall vote on any matter relating
specifically to such member. In the event that a majority of the members of the
Benefits Committee will be specifically affected by any action proposed to be
taken (as opposed to being affected in the same manner as each other Participant
in the Plan), such action shall be taken by the Compensation Committee.
10. Miscellaneous.
-------------
(a) Nothing in the Plan shall confer upon a Participant the right to
continue in the employ of the Corporation or an affiliate of the Corporation or
shall limit or restrict the right of the
-6-
<PAGE>
Corporation or any affiliate to terminate the employment of a Participant at any
time or without cause.
(b) Neither the Corporation nor any Participant hereunder shall assign,
transfer or delegate this Plan or any rights or obligations hereunder except as
expressly provided herein. Without limiting the generality of the foregoing, no
right or interest under this Plan of a Participant shall be assignable or
transferable in any manner or be subject to alienation, anticipation, sale,
pledge, encumbrance or other legal process or in any manner be liable for or
subject to the debts or liabilities of any such Participant. If any Participant
shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge
or otherwise encumber his benefits hereunder or any part thereof, or if by
reason of his bankruptcy or other event happening at any time such benefits
would devolve upon anyone else or would not be enjoyed by him, then the
Corporation, acting through the Benefits Committee, in its discretion, may
terminate his interest in any such benefit to the extent the Corporation
considers necessary or advisable to prevent or limit the effects of such
occurrence. Termination shall be effected by filing a written "termination
declaration" with the Plan's records and making reasonable efforts to deliver a
copy to the Participant (the "Terminated Participant") whose interest is
adversely affected.
As long as the Terminated Participant is alive, any benefits affected by
the termination shall be retained by the Corporation and, in the Corporation's
sole and absolute judgment, may be paid to or expended for the benefit of the
Terminated Participant, his spouse, his children or any other person or persons
in fact dependent upon him in such a manner as the Corporation shall deem
proper. Upon the death of the Terminated Participant, all benefits withheld from
him and not paid to others in accordance with the preceding sentence shall be
paid to the Terminated Participant's then living descendants, including adopted
children, per stirpes, or, if there are none then living, to his estate.
-----------
-7-
<PAGE>
(c) The Plan may be amended at any time by the Benefits Committee provided
such amendment does not have the effect of increasing, directly or indirectly,
the benefit of any Participant. The Plan may also be amended or terminated by
the Board of Directors at any time, and any amendment adopted by the Board of
Directors shall supersede any prior or later amendment adopted by the Benefits
Committee that is inconsistent with the action of the Board of Directors.
Subject to the provisions of Section 10(d), no amendment shall have the effect
of decreasing or impairing a Participant's accrued benefit, including the form
of payment. No amendment may amend or modify the preceding sentence.
(d) The Plan is intended to provide for the deferral of compensation in
accordance with the provisions of Section 409A of the Code and Treasury
Regulations and published guidance issued pursuant thereto. Accordingly, the
Plan shall be construed in a manner consistent with those provisions and may at
any time be amended in the manner and to the extent determined necessary or
desirable by the Corporation to reflect or otherwise facilitate compliance with
such provisions with respect to amounts deferred on or after January 1, 2005,
including as contemplated by Section 885(f) of the American Jobs Creation Act of
2004. Moreover, to the extent permitted in guidance issued by the Secretary of
the Treasury and in accordance with procedures established by the Committee, a
Participant may be permitted to terminate participation in the Plan or cancel an
outstanding deferral election with regard to amounts deferred after December 31,
2004. Notwithstanding any provisions of the Plan to the contrary, no otherwise
permissible election or distribution shall be made or given effect under the
Plan that would result in taxation of any amount under Section 409A of the Code.
(e) The Plan is intended to be an "excess benefit plan" as defined in
Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and exempt from the provisions of Title I of ERISA pursuant to ERISA
Section 4(b)(5). In the event the Plan does
-8-
<PAGE>
not qualify for the exemption under ERISA Section 4(b)(5) and it is also
determined by a court of competent jurisdiction or by an opinion of counsel that
the Plan constitutes an employee pension benefit plan within the meaning of
Section 3(2) of ERISA which is not exempt from the provisions of Sections 201,
301 and 401 of ERISA as a plan that provides benefits for "management or highly
compensated" employees within the meaning of such Sections, the Plan shall
terminate, and except for accrued benefits and benefits in pay status, no
further benefits shall accrue or be paid hereunder.
(f) If any provision in the Plan is held by a court of competent
jurisdiction to be invalid, void or unenforceable, the remaining provisions
shall nevertheless continue to full force and effect without being impaired or
invalidated in any way.
(g) The Plan shall be construed and governed in all respects in accordance
with applicable federal law and, to the extent not preempted by such federal
law, in accordance with the law of the State of Ohio.
-9-
<PAGE>
APPROVAL AND ADOPTION
The Eaton Corporation Excess Benefits Plan II, in the form attached hereto, is
hereby approved and adopted.
/s/ Susan J. Cook Date: December 10, 2004
- -------------------------------------
Name
Vice President- Human Resource
- -------------------------------------
Title
/s/ Earl R. Franklin
- -------------------------------------
Name
Vice President and Secretary
- -------------------------------------
Title
-9-
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.BB
<SEQUENCE>7
<FILENAME>l12544aexv10wbb.txt
<DESCRIPTION>EX-10(BB) LIMITED EATON SERVICE SUPP RETIRE INCOME PLAN II
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(bb)
LIMITED EATON SERVICE
SUPPLEMENTAL RETIREMENT INCOME PLAN II
Eaton Corporation (the "Company") hereby establishes a Supplemental
Retirement Income Plan II (herein referred to as the "Plan") for certain
executives of the Company designated as set forth herein. The Plan is adopted
December 8, 2004, effective January 1, 2005.
ARTICLE I
PURPOSE OF THE PLAN
-------------------
Upon becoming employed by the Company, certain key executives may have
foregone retirement benefits from their former employer and may not be able to
earn adequate pension benefits from the Company. The Company believes that it is
in the best interest of the Company to be able to attract and retain such
mid-career executives. The purpose of the Plan is to provide each such executive
with retirement income in an amount as set forth in Article IV, and thereby
provide a total pension benefit that is comparable to the benefit the executive
would have received if he or she had not agreed to the mid-career change in
employment.
ARTICLE II
ELIGIBILITY
-----------
All elected officers of the Company and any other executive of the Company
designated by the Chairman and Chief Executive Officer of the Company shall be
eligible to participate under the Plan (a "Participant").
<PAGE>
ARTICLE III
DEFINITIONS
As used in the Plan the following definitions shall apply:
"Average Final Annual Compensation." The Participant's Average Final Annual
---------------------------------
Compensation determined as if he or she is eligible to participate under
Appendix A of the Pension Plan.
"Board." The Board of Directors of the Company.
-----
"Cause." For purposes of this Plan, the Company shall have "Cause" to
-----
terminate the Participant's employment upon (i) the willful and continued
failure by the Participant to substantially perform the Participant's duties
with the Company (other than any such failure resulting 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
the Company. 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 the Company.
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.
2
<PAGE>
"Change in Control of the Company." A "Change in Control of the Company"
--------------------------------
shall be determined in accordance the provisions of Section 409A of the Code and
Treasury Regulations and published guidance issued pursuant thereto.
"Committee." The Compensation and Organization Committee of the Board.
---------
"Credited Service." The service credited to a Participant as "Service"
----------------
under the Pension Plan.
"Disability." Any termination of employment which entitles the Participant
----------
to a disability benefit under the Pension Plan.
"Good Reason." Any termination of employment 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 the Company immediately
prior to a Change in Control of the Company, or a change in the
Participant's reporting responsibilities, titles or offices as in effect
immediately prior to a Change in Control of the Company, 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 the Company in the Participant's base salary as in
effect immediately prior to the Change in Control of the Company or as the
same may be increased from time to time thereafter; or the failure by the
Company to increase such base salary each year after a Change in Control of
the Company 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 the Company;
3
<PAGE>
(iii) a failure by the Company to continue the Participant's participation
in the Plan, the Company's Executive Incentive Compensation Plan, Deferred
Incentive Compensation Plan II, Executive Strategic Incentive Plan,
Incentive Compensation Deferral Plan II, Excess Benefits Plan II and
Supplemental Benefits Plan II, as each plan may be modified from time to
time but substantially in the form presently in effect (collectively, the
"Plans"), on at least the basis as in effect immediately prior to the
Change in Control of the Company or to pay Participant any amounts earned
under the Plans in accordance with the terms of the Plans.
(iv) the relocation of the Company's principal executive offices to a
location outside Cuyahoga County, Ohio or any county adjoining Cuyahoga
County, Ohio, or the Company's requiring the Participant to be based
anywhere other than the Company's principal executive offices or the
location where the Participant is based immediately prior to the Change in
Control of the Company except for required travel on the Company's business
to an extent substantially consistent with the Participant's business
travel obligations in effect immediately prior to the Change in Control of
the Company, or, in the event the Participant consents to any such
relocation of the Company's principal executive offices, the failure by the
Company 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 the Company)
realized in the sale of the Participant's principal residence in connection
with any such change of residence;
(v) the failure by the Company to continue in effect any benefit or
compensation plan (including but not limited to the Plan), pension plan,
life insurance plan, health and accident plan or disability plan in which
the Participant is participating at the time of a
4
<PAGE>
Change in Control of the Company (or plans providing the Participant with
substantially similar benefits), the taking of any action by the Company
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 the Company, or
the failure by the Company 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 the Company in accordance with the Company's
normal vacation policy in effect immediately prior to the Change in Control
of the Company;
(vi) the failure of the Company to obtain the agreement by any successor
(whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the assets of the Company, by
agreement in form and substance satisfactory to Participant, to expressly
assume this Plan and the obligations of the Company 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 the Plan, no such purported termination shall be effective.
"Notice of Termination." Any termination of the Participant's employment by
---------------------
the Company for Cause or Disability or by the Participant for Good Reason shall
be communicated by written Notice of Termination to the other party hereto. 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.
"Pension Plan." The Pension Plan for Eaton Corporation Employees.
------------
5
<PAGE>
"Supplement." The annual amount of retirement income or the lump sum
----------
payable to the Participant in accordance with the provisions of the Plan. This
amount is calculated as follows:
(a) the Participant's Average Final Annual Compensation, multiplied by the
applicable percentage from Table A in Section 4.01 associated with the
Participant's age and service, MINUS
(b) the Participant's annual benefits payable from the Pension Plan, the
Limited Eaton Service Supplemental Retirement Income Plan, the Supplemental
Benefits Plan, the Supplemental Benefits Plan II, the Excess Benefits Plan,
and the Excess Benefits Plan II (collectively, the "Offset Benefits"),
assuming payment in the form of a single life annuity.
"Termination of Employment." The date the Participant's Service ends under
-------------------------
the Pension Plan.
ARTICLE IV
AMOUNT OF SUPPLEMENT
--------------------
Section 4.01. Calculation of Supplement. The annual retirement income
-------------------------
payable under the Plan shall be calculated by reference to Table A below. There
is no amount under age 55 and the full percentage available is earned at
attainment of age 62.
Table A
Percentage of Average Final Annual Compensation
-----------------------------------------------
<TABLE>
<CAPTION>
For Participants with Less Than 15 Years of Credited Service
Months
---------------------------------------------------------------------------------
Age* 0 1 2 3 4 5 6 7 8 9 10 11
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
55 25.0% 25.3% 25.5% 25.8% 26.0% 26.3% 26.5% 26.8% 27.0% 27.3% 27.5% 27.8%
56 28.0% 28.3% 28.5% 28.8% 29.0% 29.3% 29.5% 29.8% 30.0% 30.3% 30.5% 30.8%
57 31.0% 31.3% 31.5% 31.8% 32.0% 32.3% 32.5% 32.8% 33.0% 33.3% 33.5% 33.8%
58 34.0% 34.3% 34.5% 34.8% 35.0% 35.3% 35.5% 35.8% 36.0% 36.3% 36.5% 36.8%
59 37.0% 37.3% 37.5% 37.8% 38.0% 38.3% 38.5% 38.8% 39.0% 39.3% 39.5% 39.8%
60 40.0% 40.2% 40.3% 40.5% 40.7% 40.8% 41.0% 41.2% 41.3% 41.5% 41.7% 41.8%
61 42.0% 42.2% 42.3% 42.5% 42.7% 42.8% 43.0% 43.2% 43.3% 43.5% 43.7% 43.8%
62 44.0%
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For Participants with At Least 15 Years of Credited Service
Months
---------------------------------------------------------------------------------
Age* 0 1 2 3 4 5 6 7 8 9 10 11
- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
55 28.5% 28.8% 29.1% 29.4% 29.7% 30.0% 30.3% 30.5% 30.8% 31.1% 31.4% 31.7%
56 32.0% 32.3% 32.6% 32.9% 33.2% 33.5% 33.8% 34.0% 34.3% 34.6% 34.9% 35.2%
57 35.5% 35.8% 36.1% 36.4% 36.7% 37.0% 37.3% 37.5% 37.8% 38.1% 38.4% 38.7%
58 39.0% 39.3% 39.6% 39.9% 40.2% 40.5% 40.8% 41.0% 41.3% 41.6% 41.9% 42.2%
59 42.5% 42.8% 43.1% 43.4% 43.7% 44.0% 44.3% 44.5% 44.8% 45.1% 45.4% 45.7%
60 46.0% 46.2% 46.3% 46.5% 46.7% 46.8% 47.0% 47.2% 47.3% 47.5% 47.7% 47.8%
61 48.0% 48.2% 48.3% 48.5% 48.7% 48.8% 49.0% 49.2% 49.3% 49.5% 49.7% 49.8%
62 50.0%
</TABLE>
* Age at Termination of Employment.
Section 4.02. No Interest Created. Neither the Participant nor his or her
-------------------
surviving spouse shall have any interest in any specific asset of the Company,
including policies of insurance. The Participant and his or her surviving spouse
or beneficiary shall have only the right to receive the benefits provided under
the Plan.
Section 4.03. Determination of Annual Amount. The Supplement shall be
------------------------------
calculated assuming that the Offset Benefits commence on the same date as the
Supplement.
Section 4.04. Form of Payment. The Supplement shall be paid to the
---------------
Participant either in a single sum payment or in a form of annuity available
under the terms of the Pension Plan (which forms of annuity shall be limited to
an annuity for the life of a Participant (with the exception that this form
shall be available to unmarried Participants only), a 120-month certain period
and life annuity, a joint and 50% surviving spouse annuity, and a joint and 100%
surviving spouse annuity), as elected by the Participant in accordance with
Treasury guidance pursuant to Section 409A of the Code, provided that in the
event no election has been made with respect to any portion or all of a benefit
payable under the Plan, such benefit shall be paid in a single sum payment.
Whether the Participant elects an optional annuity form of benefit available
under the terms of the Pension Plan or a lump sum benefit, the benefit payable
shall be actuarially adjusted by using the same actuarial factors as used under
the Pension Plan for converting the normal form of benefit to an actuarially
equivalent optional benefit, provided that the joint and 50% surviving spouse
annuity shall not be reduced from the single life annuity form to reflect the
spousal coverage. A Participant need not receive the Supplement in the same form
as the form of benefit elected by the Participant under the Pension Plan.
Notwithstanding the
7
<PAGE>
foregoing, a Participant may change an election from one available form of
annuity payments to another available form of annuity payments, but only to the
extent permitted in Treasury regulations under Section 409A of the Code.
Section 4.05. Commencement of Benefits. The benefit payable to a
------------------------
Participant under the Plan shall be paid or shall begin on the first day of the
month following the later of his or her separation from service (within the
meaning of Section 409A of the Code) or the date he or she is first eligible for
commencement of benefits under the Pension Plan (whether or not he or she has
applied for commencement of benefits thereunder), except that in the case of a
Participant who is a key employee as defined in Section 416(i) of the Code and
applicable Treasury regulations, payment shall not in any event be made or begin
until the first business day of the month which is at least six months after the
date of his or her separation from service (or, if earlier, the date of death of
the Participant).
ARTICLE V
PAYMENT OF SUPPLEMENT
Section 5.01. General Obligation. The Company will pay the Supplement to
------------------
Participant for life in equal monthly installments, commencing on the first
business day of the month following the month in which Participant retires under
the terms of the Pension Plan after attaining age 55, except that in the case of
a Participant who is a key employee as defined in Section 416(i) of the Code and
applicable Treasury regulations, payment shall not begin until the first
business day of the month which is at least six months after the date of his or
her separation from service (or, if earlier, the date of death of the
Participant), or on the first business day of the month following the month in
which Participant's employment terminated due to Disability. Notwithstanding
anything herein to the contrary, the Company shall have no obligation to pay the
Supplement to the Participant if the Participant terminates employment with the
Company (a) for any reason prior to age 55, or (b) with less than ten (10) years
of Credited Service unless the Participant is age 65 at the time of termination
of employment.
8
<PAGE>
Section 5.02. Death. If the Participant dies after attaining age 55 and
----- while employed by the Company (regardless of the
Participant's Credited Service), the Company will pay a benefit to the
Participant's surviving spouse calculated in accordance with the Plan. The
surviving spouse will receive 50% of the benefit that would have been payable to
the Participant if the Participant had not less than ten (10) years of Credited
Service and terminated on the date of death, payable in either a single life
annuity or lump sum, as elected by the Participant. Notwithstanding the
foregoing, a Participant may elect a beneficiary other than his or her spouse
(as permitted under the Pension Plan except that no spousal consent shall be
required), with the benefit amount determined in the same manner as for a
surviving spouse and payable in a lump sum form of payment only. For this lump
sum calculation, the nonspouse beneficiary shall be assumed to have the same age
as the Participant. If a Participant dies after Termination of Employment but
before commencement of benefits, the payment due to the surviving spouse or
other beneficiary shall be calculated using the method described above.
ARTICLE VI
COVENANTS OF PARTICIPANT
------------------------
By accepting payments hereunder the Participant covenants that for a period
of three (3) years after the Participant leaves the employment of the Company,
he or she will not engage in any activities which, in the opinion of the
Company, are in competition with the Company or any of its subsidiaries without
first obtaining the written consent of the Company; provided, however, that this
provision shall not apply if, within five (5) years after a Change in Control of
the Company, the Participant's employment with the Company is terminated by the
Participant for Good Reason or by the Company without Cause.
ARTICLE VII
LOSS OF BENEFITS
----------------
If the Participant fails to observe or perform any of the covenants by the
Participant contained herein in any material respect, the Participant shall
forfeit all rights which he or she may have to any benefits for which provision
is made herein.
9
<PAGE>
ARTICLE VIII
AUTOMATIC LUMP SUM PAYMENT
--------------------------
Section 8.01. Automatic Payment. Except as provided below in this Article
-----------------
VIII, upon the date of a Change in Control of the Company, the Company shall
make an immediate Lump Sum Payment to each Participant or his or her surviving
spouse (or other beneficiary determined by the Participant), as the case may be.
Section 8.02. Determination of Lump Sum Payment. Lump Sum Payment means an
---------------------------------
amount equal to the present value of the total number of annual payments which
otherwise would have been made under the Plan based on the assumption that the
Participant's employment with the Company has terminated as of the date of the
Change in Control of the Company and as calculated using the mortality tables
used for the Pension Plan and a rate of interest equal to "Moody's Corporate
Bond Yield Average--Monthly (Average Corporate)" as then most recently
published. In the event the Participant or the Participant's surviving spouse
has begun to receive benefit payments under the Plan prior to the date of the
Change in Control of the Company, the amount of such Lump Sum Payment shall be
equal to the present value of the remaining annual payments which otherwise
would have been made, calculated as described in this Section 8.02.
Section 8.03. Participation after a Change in Control of the Company. In
------------------------------------------------------
the event that the Plan is not terminated after a Change in Control of the
Company, any future payment made under the Plan to a Participant who has
received a Lump Sum Payment shall be reduced by taking into account the amount
of such Lump Sum Payment in a manner determined by the Company at the time of
such Lump Sum Payment.
ARTICLE IX
MISCELLANEOUS
-------------
Section 9.01. Assignment. Except as otherwise provided herein, neither the
----------
Participant nor any beneficiary for which provision is made herein shall have
the right to sell, alienate,
10
<PAGE>
anticipate, assign, transfer, pledge, encumber or otherwise convey the right to
receive the Supplement.
Section 9.02. No Contract of Employment. The Plan shall not be deemed to
-------------------------
constitute a contract of employment between the parties hereto, nor shall any
provision hereof restrict the right of the Company to discharge the Participant,
or restrict the right of the Participant to terminate his or her employment with
the Company.
Section 9.03. Security. The rights of the Participant under the Plan shall
--------
be solely those of an unsecured creditor of the Company. Any securities or fixed
or other assets acquired by the Company in order to be able to satisfy the
liabilities assumed by it hereunder, shall not be deemed to be held under any
trust for the benefit of the Participant or to be considered security for the
performance of the obligations of the Company but shall be, and remain, general,
unpledged, unrestricted assets of the Company.
Section 9.04. Governing Law. The Plan shall be subject to and construed
-------------
under the laws of the State of Ohio, without giving effect to any conflicts of
laws principles thereunder.
Section 9.05. Amendment and Termination. The Company may at any time amend
-------------------------
or terminate the Plan. Notwithstanding the foregoing, upon the occurrence of a
Change in Control of the Company, no amendment or termination shall, without the
consent of the Participant, alter or impair any vested rights of the Participant
under the Plan based upon the Participant's age and years of Credited Service at
the time of such amendment or termination or the manner in which amounts are to
be paid to the Participant or his or her surviving spouse or beneficiary under
the Plan.
Section 9.06. American Jobs Creation Act. The Plan is intended to provide
--------------------------
for the deferral of compensation in accordance with the provisions of Section
409A of the Code and Treasury Regulations and published guidance issued pursuant
thereto. Accordingly, the Plan shall be construed in a manner consistent with
those provisions and may at any time be amended in the manner and to the extent
determined necessary or desirable by the Company to reflect or
11
<PAGE>
otherwise facilitate compliance with such provisions with respect to amounts
deferred on or after January 1, 2005, including as contemplated by Section
885(f) of the American Jobs Creation Act of 2004. Moreover, to the extent
permitted in guidance issued by the Secretary of the Treasury and in accordance
with procedures established by the Committee, a Participant may be permitted to
terminate participation in the Plan or cancel an outstanding deferral election
with regard to amounts deferred after December 31, 2004. Notwithstanding any
provisions of the Plan to the contrary, no otherwise permissible election or
distribution shall be made or given effect under the Plan that would result in
taxation of any amount under Section 409A of the Code.
<PAGE>
EATON CORPORATION
/s/ Susan J. Cook Date: December 10, 2004
- ----------------------------------------
Name
Vice President - Human Resource
- ----------------------------------------
Title
/s/ Earl R. Franklin
- ----------------------------------------
Name
Vice President and Secretary
- ----------------------------------------
Title
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.CC
<SEQUENCE>8
<FILENAME>l12544aexv10wcc.txt
<DESCRIPTION>EX-10(CC) AMEND. TO PLAN FOR THE DEFERRED PAY OF DIR FEES
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(cc)
Amendment effective January 1, 2005
to
Plan for the Deferred Payment of Directors' Fees
(originally adopted October 23, 1985 and as restated effective
as of February 24, 2004)
WHEREAS, Eaton Corporation (the "Company") presently maintains in effect
the Plan for the Deferred Payment of Directors' Fees (the "Plan") established
effective as of October 23, 1985, under an amended and restated document made
effective as of February 24, 2004;
WHEREAS, the American Jobs Creation Act of 2004 (the "Act") included
provisions that affect the operation and tax treatment of arrangements such as
the Plan, generally effective January 1, 2005;
WHEREAS, it is desired that amounts earned and vested under the Plan for
periods before January 1, 2005, remain subject to the law as in effect prior to
enactment of the Act and that no material modification of any kind be made to
the Plan or given effect after October 3, 2004, with respect to such amounts;
and
WHEREAS, it is desired to amend the Plan only as it relates to deferrals
after December 31, 2004, to reflect the provisions of the Act, so as to enable
the Participants under the Plan to continue to defer some or all eligible fees
which may be payable to them for future services as a member of the Board of
Directors of the Company or as chairman or a member of any committee of the
Board;
NOW, THEREFORE, the Plan is hereby amended in the respects hereinafter set
forth, but with respect only to amounts deferred after December 31, 2004.
1. Section 2.07 is amended to provide as follows:
2.07 "Deferred Account Balance": At any particular date, the total of all
------------------------
Compensation deferred under the Plan and earnings credited thereto less the
amount of any deferred Compensation previously paid to the Participant;
provided that separate records shall be maintained within the Deferred
Account Balance to reflect Compensation deferred under the Plan for periods
ending on and before December 31, 2004 and earnings credited thereto and
Compensation deferred under the Plan for periods ending on and after
January 1, 2005 and earnings credited thereto.
<PAGE>
2. Section 2.08 is amended to provide as follows:
2.08 "Deferred Compensation Agreement": The written agreement between the
-------------------------------
Company and a Participant substantially in the form attached hereto as
Exhibit A and made a part hereof, as the form of agreement may be amended
by the Company from time to time.
3. Section 2.10 shall cease to be applicable and is amended to provide as
follows:
2.10 Reserved.
4. Section 2.19 shall cease to be applicable and is amended to provide as
follows:
2.19 Reserved.
5. A new paragraph (c) is added to Section 3.02 to provide as follows:
(c) The Deferred Compensation Agreement electing deferral of Compensation
for a particular calendar year must be made as described in paragraph
(a) not later than December 31 of the preceding calendar year.
Beginning with Compensation earned on and after January 1, 2005, the
Deferred Compensation Agreement shall also contain the Participant's
election with respect to the form of payment of such amounts.
6. Paragraph (b) of Section 4.01 is amended to provide as follows:
(b) The Normal Plan Participation Termination Benefit shall be calculated
by reference to the Participant's total Compensation deferred under
the Plan and the rate or rates of interest specified in his or her
Deferred Compensation Agreement; provided, however, that at the
Participant's election, the Normal Plan Participation Termination
Benefit shall be paid in a Lump Sum Payment.
7. Section 4.02 shall cease to be applicable and is amended to provide as
follows:
4.02 Reserved.
8. A new Section 4.04 is added to provide as follows:
4.04 "Limitations on Distribution": Notwithstanding any provision of the Plan to
---------------------------
the contrary, Compensation deferred under the Plan shall not be distributed
earlier than
2
<PAGE>
(a) separation from service as determined by the Secretary of the Treasury
(except as provided below with respect to a key employee of the
Company);
(b) the date the Participant becomes disabled (within the meaning of
Section 409A(a)(2)(C) of the Internal Revenue Code of 1986, as amended
(the "Code"));
(c) death of the Participant;
(d) a specified time (or pursuant to a fixed schedule) specified under the
Plan at the date of the deferral of such Compensation;
(e) to the extent provided by the Secretary of the Treasury, a change in
the ownership or effective control of the Company, or in the ownership
of a substantial portion of the assets of the Company; or
(f) the occurrence of an unforeseeable emergency as defined in Section
409A(a)(2)(B)(ii) of the Code.
In the case of any key employee (as defined in Section 416(i) of the Code
without regard to paragraph (5) thereof) of the Company, distributions may
not be made before the date which is six months after the date of
separation from service (or, if earlier, the date of death of the
Participant).
9. Section 5.02 is amended to provide as follows:
5.02 "Amount of Survivor Benefit": The Survivor Benefit shall be an amount equal
--------------------------
to the Participant's Deferred Account Balance at the date of his or her
death together with interest thereon, compounded annually, from the date
Compensation was deferred until the date it is completely paid by the
Company (a "Deferral Period") at a rate equal to the prime rate set forth
in The Wall Street Journal (or any successor thereto) (hereinafter referred
----------------------- to as the "Prime Rate") from time to time during
the Deferral Period. The Survivor Benefit shall be paid in a lump sum.
10. Section 5.03 is amended to provide as follows:
5.03 "Survivor Benefit After Commencement of Benefit Payments to the
--------------------------------------------------------------
Participant": In the event a Participant who has begun to receive benefit
-----------
installment payments under the Plan dies prior to full payment of his or
her Normal Plan Participation Termination Benefit or Early Termination
Benefit, all remaining payments due hereunder shall be made to such
Participant's Designated Beneficiary in a lump sum.
11. Section 6.02 shall cease to be applicable and is amended to provide as
follows:
3
<PAGE>
6.02 Reserved.
12. Section 7.02 shall cease to be applicable and is amended to provide as
follows:
7.02 Reserved.
13. A new Section 8.07 is added to provide as follows:
8.07 "American Jobs Creation Act of 2004 ": The Plan is intended to provide for
----------------------------------
the deferral of compensation in accordance with the provisions of Section
409A of the Code and Treasury Regulations and published guidance issued
pursuant thereto for Compensation deferred after December 31, 2004.
Accordingly, the Plan shall be construed in a manner consistent with those
provisions and may at any time be amended in the manner and to the extent
determined necessary or desirable by the Company to reflect or otherwise
facilitate compliance with such provisions with respect to amounts deferred
on and after January 1, 2005, including as contemplated by Section 885(f)
of the American Jobs Creation Act of 2004. Moreover, to the extent
permitted in guidance issued by the Secretary of the Treasury and in
accordance with procedures established by the Committee, a Participant may
be permitted to terminate participation in the Plan or cancel an
outstanding deferral election with regard to amounts deferred after
December 31, 2004. Notwithstanding any provisions of the Plan to the
contrary, no otherwise permissible election or distribution shall be made
or given effect under the Plan that would result in taxation of any amount
under Section 409A of the Code.
4
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.DD
<SEQUENCE>9
<FILENAME>l12544aexv10wdd.txt
<DESCRIPTION>EX-10(DD) FORM OF STOCK OPTION AGREEMENT FOR NON-EMPLOYEE DI
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(dd)
EATON CORPORATION
200_ STOCK OPTION GRANT
NON-QUALIFIED STOCK OPTION AGREEMENT
(NON-EMPLOYEE DIRECTOR)
Name __________________________("Optionholder") Date of Grant _______________
Number of Shares ______________ Option Price ________________
EATON CORPORATION, an Ohio corporation (the "Company"), hereby grants to the
Optionholder, in consideration of service by him or her as a member of the Board
of Directors of the Company (the "Board"), the option to purchase from the
Company the number of common shares of the Company with a par value of fifty
cents each (the "Common Shares") specified above from time to time during a
period which shall end at the close of business on the tenth anniversary of the
date of the granting of this option (such period being referred to as the "fixed
term of the option"), unless sooner terminated as hereinafter provided. For
purposes of the foregoing sentence, "close of business" shall mean 5:00 p.m.
Eastern Time on the day of such tenth anniversary unless that day falls on a
Saturday, Sunday or other day when the Company is not open for business, in
which case "close of business" shall mean 5:00 p.m. Eastern Time on the
immediately preceding day when the Company is open for business. This option is
subject to, and is granted in accordance with, the _____ Stock Plan (the "____
Plan"), and upon the terms and conditions herein set forth.
I. TERMS OF EXERCISE OF OPTION
A. By the Optionholder While Serving as a Member of the Board.
This option shall become exercisable after a period of six months following the
date of grant, provided the Optionholder remains in continuous service as a
member of the Board for that period. The Optionholder, while serving as a member
of the Board, may exercise this option at any time after this option becomes
exercisable, but not later than the end of the fixed term of the option. The
Governance Committee of the Board (the "Committee") reserves the right to decide
to what extent leaves of absence for government service, illness, temporary
disability, or other reasons shall not be deemed to be an interruption of
continuous service. Notwithstanding the foregoing provisions of this Section I
A, this option may be exercised after service on the Board ends as provided in
Section I B below.
B. By the Optionholder When No Longer Serving as a Member of the Board.
<PAGE>
The Optionholder may not exercise this option after he or she ceases to serve as
a member of the Board, except that if the Optionholder ceases to serve as a
member of the Board after reaching the retirement age designated by the
then-current Board retirement policy or after at least ten years' service on the
Board, then he or she may exercise this option at any time after a period of six
months following the date of grant, but not later than the end of the fixed term
of the option.
I. TERMS OF EXERCISE OF OPTION (continued)
C. In case of the Death of the Optionholder.
If the Optionholder is entitled to exercise this option at the date of his or
her death, then this option may be exercised during the period of 12 months
after the death of the Optionholder (but no later than the end of the fixed term
of the option) by the Optionholder's estate or by a person or persons who have
acquired the right to exercise this option by bequest or inheritance. This
option may be so exercised only as to the number of Common Shares for which it
could have been exercised at the time the Optionholder died.
D. Termination.
This option shall in no event be exercisable after the expiration of the fixed
term of the option, notwithstanding anything to the contrary in Sections I A, B
or C above. The option hereby granted shall be considered terminated, in whole
or in part, to the extent that it can no longer be exercised under the terms
hereof or under the terms of the 1998 Plan, for the Common Shares originally
subject to this option, or in the event the Optionholder shall fail, within 60
days after the date of the granting of this option, to deliver to the Company an
acceptance of such option executed by him or her.
E. Acceleration - Change in Control.
Notwithstanding anything in Section I A or B to the contrary, the outstanding
option shall become immediately exercisable for all of the Common Shares subject
to the option upon a change in control of the Company (as defined below).
For purposes of this Agreement, a "change in control of the Company" shall be
deemed to have occurred if (i) a tender offer shall be made and consummated for
the ownership of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding voting securities, (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, 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) the Company shall sell
substantially all of its assets to another corporation which is not a
wholly-owned subsidiary of the Company, (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 the Company
representing 25% or more of the combined voting power of the Company'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 election, or the
nomination for election by the Company's shareholders, of
2
<PAGE>
E. Acceleration - Change in Control. (continued)
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 Agreement, ownership of voting securities shall take into
account and include ownership as determined by applying the provisions of Rule
13d-3(d)(1) of the Exchange Act (as then in effect).
II. METHODS OF EXERCISING OPTION - RIGHTS AS SHAREHOLDERS
A. This option shall be deemed exercised when the person(s) or estate
entitled to exercise it shall indicate the decision to do so, as to all or any
part of the Common Shares for which it may then be exercised, in a single
writing for each exercise delivered to the Company at its principal office and
shall at that time tender to the Company payment in full for the Common Shares
as to which the option is exercised in cash or by a check which shall be paid
upon presentment to the bank upon which drawn or, with the approval of the
Committee, by delivery to the Company of Common Shares owned by the
Optionholder, or by tender of a combination of cash (or a check as herein
described) and Common Shares. A partial exercise of this option shall not affect
the right to exercise it from time to time thereafter as to the remaining Common
Shares subject to the option.
B. No holder of this option shall have any rights as a shareholder with
respect to any Common Shares subject to the option unless and until he or she
shall have received a certificate or certificates for such Common Shares.
Subject to compliance with all the terms and conditions hereof and of the 1998
Plan, including all rules, regulations and determinations of the Committee, the
Company shall, as promptly as possible after any exercise of this option,
deliver a certificate or certificates for an appropriate number of Common
Shares; provided, however, that no such certificate or certificates shall be so
delivered unless and until adequate provision has, in the judgment of the
Company, been made for any and all withholding taxes in respect of the exercise
of the option.
III. TRANSFER OF OPTION
Except as otherwise provided by the Committee, this option shall not be
transferable otherwise than by will or the law of descent and distribution.
IV. COMPLIANCE WITH LAWS, REGULATIONS AND RULES
The Company will use its best efforts to comply with all federal and state laws
and regulations, and all rules of domestic stock exchanges on which its Common
Shares may be listed, which apply to the issuance of the Common Shares subject
to this option, and to obtain such consents and approvals to such issuance which
it deems advisable from federal and state bodies having jurisdiction of such
matters. However, anything herein to the contrary notwithstanding, this option
shall not be exercisable, and the Company shall not be obliged to issue or
deliver any certificate for shares subject to this option, if such exercise,
issuance
3
<PAGE>
IV. COMPLIANCE WITH LAWS, REGULATIONS AND RULES (continued)
or delivery would violate any such laws, regulations or rules and unless and
until such consents and approvals have been obtained. Any share certificate
issued to evidence Common Shares as to which this option is exercised may bear
such legends and statements as the Committee shall deem advisable to assure
compliance with federal and state laws and regulations.
If any person(s) or estate purporting to acquire the right to exercise this
option by bequest or inheritance shall attempt to exercise this option, the
Committee may require reasonable evidence as to the ownership of this option and
may request such consents and releases of taxing authorities, as the Committee
may deem advisable.
V. ADJUSTMENT UPON CHANGE OF SHARES
In the event that the outstanding Common Shares shall be changed in number or
class by reason of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, spin off,
stock dividend, rights offering or other event affecting Common Shares, the
number and class of Common Shares subject to this option and the price per share
payable upon exercise of this option shall be equitably adjusted as determined
by the Committee so as to reflect such change. No adjustment provided for in
this Section V shall require the Company to sell or transfer a fractional share.
No exercise of any conversion rights by the holders of any of the Company's
preferred shares or serial preferred shares or convertible indebtedness
hereafter issued shall call for any adjustment under this Section V.
VI. COMPETITION BY OPTIONHOLDER
In the event that the Optionholder within one year after exercise of any portion
of this option enters into an activity as employee, agent, officer, director,
principal or proprietor which, in the sole judgment of the Committee, is in
competition with the Company or a subsidiary, the amount by which the fair
market value per share on the date of exercise of any such portion exceeds the
option price per Common Share hereunder, multiplied by the number of Common
Shares subject to such exercised portion, shall inure to the benefit of the
Company; and the Optionholder shall pay the same to the Company, unless the
Committee in its sole discretion shall determine that such action by the
Optionholder is not inimical to the best interest of the Company or its
subsidiaries.
VII. ENFORCEABILITY
This Agreement shall be binding upon and inure to the benefit of (1) the
Company, and its successors and assigns, and (2) the Optionholder and his or her
personal representatives, executors, administrators, legatees and distributees.
4
<PAGE>
VIII. STOCK OPTION PLAN CONTROLS
The terms and conditions of the 1998 Plan, as amended from time to time in
accordance with the provisions of Section 11 thereof, shall control the terms
and conditions of this option, and anything contained in this Agreement
inconsistent with or in violation of the terms and conditions of the 1998 Plan
shall be of no force or effect and shall not be binding upon the Company or the
Optionholder.
IX. CONSTRUCTION
It is intended that acquisition of this option by the Optionholder shall qualify
for exemption from the provisions of Section 16(b) of the Exchange Act, and each
and every provision of this Agreement shall be construed, interpreted and
administered so that the grant of this option shall so qualify. Any provision of
this Agreement that cannot be so construed interpreted and administered shall be
of no force or effect.
X. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State of
Ohio, except as otherwise specifically provided herein.
EATON CORPORATION
By
---------------------------
And by
-----------------------
ACCEPTANCE OF OPTION BY
OPTIONHOLDER
Accepted by
---------------------------
Signature
Date
----------------------------------
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.EE
<SEQUENCE>10
<FILENAME>l12544aexv10wee.txt
<DESCRIPTION>EX-10(EE) FORM OF STOCK OPTION AGREEMENT FOR EXECUTIVE
<TEXT>
<PAGE>
(EATON LOGO)
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(ee)
200_ STOCK OPTION GRANT
STOCK OPTION AGREEMENT UNDER THE _______ STOCK PLAN
OPTIONHOLDER:
DATE OF GRANT:
DATE OF EXPIRATION:
OPTION PRICE: $____ MARKET VALUE:
TOTAL NUMBER OF STOCK OPTIONS:
INCENTIVE STOCK OPTION SHARES:
NON-QUALIFIED STOCK OPTION SHARES:
EATON CORPORATION, an Ohio corporation (the "Company"), hereby grants to the
Optionholder, in consideration of service by him or her to the Company or a
subsidiary of the Company, the option to purchase from the Company common shares
of the Company with a par value of fifty cents each (the "Common Shares") from
time to time during a period which shall end at the close of business on the
tenth anniversary of the date of the granting of this option, unless sooner
terminated as hereinafter provided. For purposes of the foregoing sentence,
"close of business" shall mean 5:00 P. M. Eastern Time on the day of such tenth
anniversary unless that day falls on a Saturday, Sunday or other day when the
Company's World Headquarters is not open for business, in which case "close of
business" shall mean 5:00 P.M. Eastern Time on the immediately preceding day
when the Company is open for business. This option is subject to, and is granted
in accordance with, the _____ Stock Plan (the "____ Plan"), and upon the terms
and conditions herein set forth. The Incentive Stock Option Shares (as specified
above) are intended to qualify as an "Incentive Stock Option" under Section
422(a) of the Internal Revenue Code, as amended from time to time. The
Nonqualified Stock Option Shares (as specified above) are not intended to
qualify as an Incentive Stock Option. This option is subject to, and is granted
in accordance with, the 2002 Stock Plan (the "_____ Plan"), and upon the terms
and conditions herein set forth. For purposes of this Agreement, "subsidiary"
shall mean an entity whose financial results are consolidated with those of the
Company for purposes of the Statement of Consolidated Income included in the
Company's annual report to shareholders.
I. TERMS OF EXERCISE OF OPTION
A. By the Optionholder While an Employee of the Company or a Subsidiary
The Optionholder may exercise this option only after he or she remains in the
continuous employment of the Company for a period of one year from the date of
granting of this option and only as to the number of shares which become vested
as set forth below. Employment by a subsidiary shall be counted as employment by
the Company.
Subject to Section I. B. hereof, after one year of such continuous employment
following the date of grant of this option, the Optionholder, while still so
employed, may exercise this option as follows:
[insert vesting schedule here]
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
The Compensation and Organization Committee of the Board of Directors of the
Company (the "Committee") reserves the right to decide to what extent leaves of
absence for government or military service, illness, temporary disability, or
other reasons shall not be deemed to be an interruption of continuous
employment.
B. By the Optionholder When No Longer Employed by Either the Company or
a Subsidiary
1. Retirement.
If the Optionholder ceases to be an employee as a result of
retirement on or after normal retirement age (age 65 for U.S.
employees), or on or after age 50 and 10 years of service to the
Company or a subsidiary (early retirement), he or she may exercise
this option with respect to all Common Shares then subject to this
option which are vested at the date of such retirement in accordance
with the schedule set forth in Section I.A above, for a period not
to exceed the shorter of the remaining term of this option or five
years after the retirement date.
2. Divestiture of a Facility.
If the Optionholder ceases to be an employee as a result of the
divestiture of a facility where the Optionholder is employed, he or
she may exercise this option with respect to all Common Shares then
subject to this option, both vested and unvested, for a period not
to exceed 90 days after the effective date of the divestiture. If
the divestiture results in the retirement (as described in
Subsection (1) of the Optionholder, then he or she may exercise this
option with respect to all Common Shares then subject to this option
(both vested and unvested) for a period not to exceed the shorter of
the remaining term of the option or five years after the retirement
date.
3. Other Terminations.
If the Optionholder ceases to be an employee for any reason other
than those described in Subsections (1) or (2), he or she may
exercise this option only for the number of Common Shares which are
vested at the time he or she ceased to be an employee, and he or she
may exercise this option only for a period not to exceed 90 days
following the termination of employment.
4. Company Discretion.
In the case of a termination of an officer of the Company that is
subject to Subsection (1) or (3), the officer may exercise this
option for such number of Common Shares that is greater than the
number provided by those Subsections as the Committee may authorize
by acceleration of vesting or otherwise.
In the case of the termination of an employee who is not an officer
of the Company that is subject to Subsections (1) or (2), the
employee may exercise this option for such number of Common Shares
greater than provided by those Subsections as the Management
Compensation Committee ("Management Committee") may authorize by
acceleration of vesting or otherwise. In the case of any such
termination, the Chief Executive Officer may also permit this option
to become exercisable at specified times subsequent to retirement or
termination of employment.
The Optionholder should have no expectation that the Committee, the
Management Committee or the Chief Executive Officer will take any
discretionary action contemplated by this Subsection (4).
2
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
B. By the Optionholder When No Longer Employed by Either the Company or
a Subsidiary (continued)
5. Incentive Stock Options
To receive favorable tax treatment afforded Incentive Stock Options,
the Incentive Stock Option Shares must be exercised within 90 days
of retirement or within one year of termination of employment in
case of permanent and total disability. Incentive Stock Option
Shares that are not exercised within those periods will, for tax
purposes, be treated the same as Non-Qualified Stock Options.
C. By the Optionholder After Change in Position
If the Optionholder should be assigned to any position with the Company or its
subsidiaries which is, in the sole and absolute discretion of the Committee, of
lesser responsibility than that which is held by the Optionholder
upon the date hereof, thereafter the Optionholder may exercise this option
(during the term of the option) only for the number of Common Shares for which
the option was exercisable at the time of such assignment or such greater number
of Common Shares as determined by the Committee in the exercise of its sole and
absolute discretion.
D. In Case of the Death of the Optionholder
Upon the death of the Optionholder, this option shall be exercisable by the
Optionholder's estate, or by a person who has acquired the right to exercise
this option by bequest or inheritance, (i) during the period of 12 months after
the date of death (but no later than the end of the fixed term of the option)
for the number of Common Shares for which the option was exercisable upon the
date of death, and (ii) during such period of time, if any (but ending no later
than the end of the fixed term of the option), which the Committee may determine
in its sole and absolute discretion, for the number of Common Shares for which
the Optionholder could have exercised this option in accordance with its terms
prior to the expiration of that period of time if the Optionholder had lived.
E. Term
The option shall in no event be exercisable after the expiration of 10 years
from the date of the granting of the option, notwithstanding anything to the
contrary in Sections I. A, B, C or D above. The option hereby granted shall be
considered terminated and cancelled, in whole or in part, to the extent that it
can no longer be exercised under the terms hereof or under the terms of the 2002
Plan, for the Common Shares originally subject to this option, or in the event
the Optionholder shall fail, within 60 days after the granting of this option,
to deliver to the Company an acceptance of such option executed by him or her.
II. EXERCISING OPTION--RIGHTS AS A SHAREHOLDER
A. Exercise and Payment
This option shall be deemed exercised when the person or estate entitled to
exercise it shall indicate the decision to do so, as to all or any part of the
Common Shares for which it may then be exercised, in a single writing delivered
to the Company at its principal office or to other designated addresses and
shall at that time tender to the Company payment in full for the Common Shares
as to which the option is exercised in cash or by a check which shall be paid
upon presentment to the bank upon which it was drawn, or by delivery to the
Company of Common Shares owned by the Optionholder, or by tender of a
combination of cash (or a check as herein described) and Common Shares. The
aforesaid writing and tender of payment may be delivered by the Optionholder to
the Company in advance of the date of exercise, effective as of that date. A
partial exercise of this option shall not affect the right to exercise it from
time to time thereafter as to the remaining Common Shares subject to the option.
The Company shall notify the Optionholder of the expiration date of the fixed
term of this option no less than 90 days, nor more than 180 days, in advance of
such expiration date.
3
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
II. EXERCISING OPTION--RIGHTS AS A SHAREHOLDER (CONTINUED)
B. Shareholder Rights
No holder of this option shall have any rights as a shareholder with respect to
any Common Shares subject to the option unless and until he or she shall have
received a certificate or certificates for such Common Shares. Subject to
compliance with all the terms and conditions hereof and of the 2002 Plan,
including all rules, regulations and determinations of the Committee, the
Company shall, as promptly as possible after any exercise of this option,
deliver a certificate or certificates for an appropriate number of Common
Shares; provided, however, that no such certificate or certificates shall be so
delivered unless and until adequate provision has, in the judgment of the
Company, been made for any and all withholding taxes in respect of the exercise
of the option.
III. TRANSFER OF OPTION
This option shall not be transferable otherwise than by will or the law of
descent and distribution or to the extent permitted by rules or regulations
under Section 16(b) under the Securities Exchange Act of 1934 (the "Exchange
Act") and the Committee.
IV. COMPLIANCE WITH LAWS, REGULATIONS AND RULES
The Company will use its reasonable best efforts to comply with all federal and
state laws and regulations and all rules for domestic stock exchanges on which
its Common Shares may be listed, which apply to the issuance of the Common
Shares subject to this option, and to obtain such consents and approvals to such
issuance which it deems advisable from federal and state bodies having
jurisdiction of such matters. However, anything herein to the contrary
notwithstanding, this option shall not be exercisable, and the Company shall not
be obligated to issue or deliver any certificate for shares subject to this
option, in violation of any such laws, regulations or rules and unless and until
such consents and approvals have been obtained. Any share certificate issued to
evidence Common Shares as to which this option is exercised may bear such
legends and statements as the Committee shall deem advisable to assure
compliance with federal and state laws and regulations.
If a person or an estate purporting to acquire the rights to exercise this
option by bequest or inheritance shall attempt to exercise this option, the
Company may require reasonable evidence as to the ownership of this option and
may request such consents and releases of taxing authorities as it deems
advisable.
V. ADJUSTMENT UPON CHANGE OF SHARES
In the event of a reorganization, merger, consolidation, reclassification,
recapitalization, combination or exchange of shares, stock split, stock
dividend, rights offering or other event affecting Common Shares, the number and
class of Common Shares subject to this option, the price per share payable upon
exercise of this option and the conditions on which this option shall become
exercisable, shall be equitably adjusted by the Committee so as to reflect such
change. No adjustment provided for in this Section V shall require the Company
to sell or transfer a fractional share.
VI. EFFECT ON EMPLOYMENT
The granting of this option shall not give the Optionholder any right to be
retained in the employ of the Company or any subsidiary, and shall not affect
the right of the Company to terminate the employment of the Optionholder at any
time with or without assigning a reason therefore to the same extent as the
Company might have done if this option had not been granted.
4
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
VII. COMPETITION BY OPTIONHOLDER
In the event that the Optionholder voluntarily leaves employment of the Company
or a subsidiary and within one (1) year after exercise of any portion of this
option enters into an activity as employee, agent, officer, director, principal
or proprietor which, in the sole judgment of the Committee, is in competition
with the Company or a subsidiary, the amount by which the fair market value per
share on the date of exercise of any such portion exceeds the option price per
Common Share hereunder, multiplied by the number of Common Shares subject to
such exercised portion, shall inure to the benefit of the Company and the
Optionholder shall pay the same to the Company, unless the Committee in its sole
discretion shall determine that such action by the Optionholder is not inimical
to the best interest of the Company or its subsidiaries.
VIII. CHANGE OF CONTROL
A. Exercise of Option
Notwithstanding anything in Section I.A to the contrary, effective upon a Change
of Control of the Company (as defined below), this option shall become fully
exercisable for 100% of the Common Shares subject to this option.
B. Definition
For the purpose of this Agreement, a "Change of Control" shall mean:
1. The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
(a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 25% or more
of either (i) the then outstanding common shares of the
Company (the "Outstanding Common Shares") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection 1, the
following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii)
any acquisition by the Company, or (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company; or
2. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board; or
3. Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the
acquisition of assets of another corporation (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Common Shares and Outstanding Company Voting
Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 75% of,
respectively, the then outstanding common shares and the
combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation,
5
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
VIII. CHANGE OF CONTROL (CONTINUED)
B. Definition (continued)
3.
a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets
either directly or through one or more subsidiaries) in
substantially the same proportions as their ownership,
immediately prior to such Business Combination of the
Outstanding Common Shares and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding common shares of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting
securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
4. Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred as a result of any transaction or series of transactions which the
Optionholder, or any entity in which the Optionholder is a partner, officer or
more than 50% owner initiates, if immediately following the transaction or
series of transactions that would otherwise constitute a Change of Control, the
Optionholder, either alone or together with other individuals who are executive
officers of the Company immediately prior thereto, beneficially owns, directly
or indirectly, more than 10% of the then outstanding common shares of the
Company or the corporation resulting from the transaction or series of
transactions, as applicable, or of the combined voting power of the then
outstanding voting securities of the Company or such resulting corporation.
IX. ENFORCEABILITY
This Agreement shall be binding upon and inure to the benefit of the Company,
and its successors and assigns, and upon the personal representatives,
executors, administrators, legatees and distributees of the Optionholder.
X. 2002 PLAN CONTROLS
The terms and conditions of the 2002 Plan, as amended from time to time in
accordance with the provisions of Section 12 thereof, shall control the terms
and conditions of this option, and anything contained in this Agreement
inconsistent with or in violation of the terms and conditions of the 2002 Plan
shall be of no force or effect and shall not be binding upon the Company or the
Optionholder. The 2002 Plan and this Agreement represent the entire agreement
and understanding between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements, representations and understandings,
whether written or oral.
6
<PAGE>
(EATON LOGO)
200_ STOCK OPTION GRANT
XI. CONSTRUCTION
It is intended that acquisition of this option by the Optionholder shall qualify
for exemption from the provisions of Section 16(b) of the Exchange Act, and each
and every provision of this Agreement shall be construed, interpreted and
administered so that the grant of this option, whether made to an officer or
director of the Company or to any other employee of the Company or a subsidiary,
shall so qualify. Any provision of this Agreement that cannot be so construed,
interpreted and administered shall be of no force or effect.
XII. GOVERNING LAW
This Agreement shall be construed in accordance with the laws of the State of
Ohio, except as otherwise specifically provided herein.
EATON CORPORATION
ACCEPTANCE OF OPTION BY OPTIONHOLDER
Accepted by ________________________________
Signature
Date ______________________________________
7
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.FF
<SEQUENCE>11
<FILENAME>l12544aexv10wff.txt
<DESCRIPTION>EX-10(FF) FORM OF RESTRICTED SHARE AWARD AGREEMENT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 10(ff)
Date
Eaton Corporation
Eaton Center
1111 Superior Avenue
Cleveland, Ohio 44114
Attention: Vice President - Human Resources
RE: AWARD OF RESTRICTED STOCK UNDER THE EATON CORPORATION _____ STOCK PLAN
Ladies and Gentlemen:
As an employee of Eaton Corporation (the "Company"), I have received an award of
restricted common shares of the Company effective as of XXXX (the "Effective
Date") under the terms and conditions of the Company's ____ Stock Plan (the
"Plan"). I hereby acknowledge receipt of a copy of the Plan, and acknowledge and
agree as follows:
1. ACCEPTANCE. I hereby accept the aforementioned award on the terms
and conditions provided in the Plan and this Agreement.
2. RESTRICTED STOCK. I acknowledge that, as of the Effective Date, XXXX
Common Shares of the Company (the "Restricted Stock") have been awarded to me,
contingent on the continuation of my service with the Company as provided
herein. The Restricted Stock shall be forfeited and shall be immediately
re-transferred to the Company if my employment with the Company is terminated
under any circumstances whatsoever, including without limitation dismissal,
resignation, divestiture of operations, death, disability or retirement. This
possibility of forfeiture shall lapse as follows:
[vesting schedule appears here]
If any shares of Restricted Stock are forfeited for any reason, I will surrender
to the Company any certificates which I then hold evidencing such shares. I
understand that I will not be entitled to any payment in respect of shares so
forfeited.
The Compensation and Organization Committee of the Board of Directors of the
Company (the "Committee") reserves the right to decide to what extent leaves of
absence for government or
<PAGE>
military service, illness, temporary disability, or other reasons shall not be
deemed to be an interruption of continuous employment.
3. TRANSFERABILITY. Until the possibility of forfeiture lapses with
respect to any share of Restricted Stock, that share shall be non-transferable.
I agree not to make, or attempt to make, any sale, assignment, transfer or
pledge of any share of Restricted Stock prior to the date on which the
possibility of forfeiture with respect to such share lapses.
4. LEGENDS, POSSESSION AND REORGANIZATION. I acknowledge that the
certificates for the Restricted Stock will bear a legend referring to this
Agreement and to the restrictions contained herein. I further understand that
the Company may elect to retain those certificates in its possession as a means
of enforcing these restrictions. In the event of a reorganization, merger,
consolidation, reclassification, recapitalization, combination or exchange of
shares, stock split, stock dividend, rights offering or other event affecting
the Company's Common Shares, the number and class of the Restricted Stock shall
be equitably adjusted by the Committee so as to reflect that change. Any new
certificates for Restricted Stock shall bear the legends referred to in this
Section 4. No adjustment provided for in this Section 4 shall require the
Company to sell or transfer a fractional share.
5. DIVIDENDS AND VOTING. If I am the shareholder of record on any
record date for the payment of a dividend on the Restricted Stock, I will be
entitled to receive the dividend when paid, regardless of whether or not the
restrictions imposed by Section 2 have lapsed. If I am the shareholder of record
on any record date for the taking of a vote by the shareholders of the Company,
I will be entitled to vote the Restricted Stock regardless of whether or not the
restrictions imposed by Section 2 hereof have lapsed.
6. WITHHOLDINGS. I hereby authorize the Company to withhold from any
amounts otherwise payable to me, or any of my successors in interest, such
federal, state and local taxes as may be required by law in connection with the
award to me of Restricted Stock or the lapse of the possibility of forfeiture
thereof. I agree that if such amounts are insufficient, I will pay or make
arrangements satisfactory to the Company for payment of such taxes. I understand
that the Company may defer the issuance to me of a certificate evidencing shares
of Restricted Stock, or the issuance of a new certificate evidencing the lapse
of the restrictions thereon, until such payment or provision has been made. I
hereby authorize the conversion to cash by the Company of a sufficient number of
the shares of Restricted Stock to satisfy any such withholding tax obligations.
7. CONTINUED EMPLOYMENT. I acknowledge that this award of Restricted
Stock does not in any way entitle me to continued employment with the Company
for the period during which the possibility of forfeiture continues or for any
other period, and does not limit or restrict any right the Company otherwise may
have to terminate my employment.
8. COMPETITION BY EMPLOYEE. I expressly acknowledge and agree that in
the event that I voluntarily leave the employment of the Company or a subsidiary
and within one year after the vesting of the Restricted Stock enter into an
activity as employee, agent, officer, director, principal or proprietor which,
in the sole judgment of the Committee, is in competition with the
2
<PAGE>
Company or a subsidiary, the amount of the total fair market value such vested
Restricted Stock as of the vesting date shall inure to the benefit of the
Company and I agree to promptly pay the same to the Company, unless the
Committee in its sole discretion shall determine that such action by me is not
inimical to the best interest of the Company or its subsidiaries.
9. CHANGE OF CONTROL. Notwithstanding anything in this Agreement to the
contrary, effective upon a Change of Control of the Company (as defined below),
the Restricted Stock shall vest and the forfeiture restrictions referred to in
Paragraph 2 hereof shall lapse. For the purpose of this Agreement, a "Change of
Control" shall mean:
A. The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act)
(a "Person") of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Exchange Act) of 25% or more
of either (i) the then outstanding common shares of the
Company (the "Outstanding Common Shares") or (ii) the combined
voting power of the then outstanding voting securities of the
Company entitled to vote generally in the election of
directors (the "Outstanding Company Voting Securities");
provided, however, that for purposes of this subsection, the
following acquisitions shall not constitute a Change of
Control: (i) any acquisition directly from the Company, (ii)
any acquisition by the Company, or (iii) any acquisition by
any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company; or
B. Individuals who, as of the date hereof, constitute the Board
(the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof
whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least two-thirds of
the directors then comprising the Incumbent Board shall be
considered as though such individual were a member of the
Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with
respect to the election or removal of directors or other
actual or threatened solicitation of proxies or consents by or
on behalf of a Person other than the Board; or
C. Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or
substantially all of the assets of the Company or the
acquisition of assets of another corporation (a "Business
Combination"), in each case, unless, following such Business
Combination, (i) all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Common Shares and Outstanding Company Voting
Securities immediately prior to such Business Combination
beneficially own, directly or indirectly, more than 75% of,
respectively, the then outstanding common shares and the
combined voting power of the then outstanding voting
securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting
from such Business Combination (including, without limitation,
a corporation which as a result of such transaction owns the
Company or all or substantially all of the
3
<PAGE>
Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their
ownership, immediately prior to such Business Combination of
the Outstanding Common Shares and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (excluding any
employee benefit plan (or related trust) of the Company or
such corporation resulting from such Business Combination)
beneficially owns, directly or indirectly, 25% or more of,
respectively, the then outstanding common shares of the
corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting
securities of such corporation except to the extent that such
ownership existed prior to the Business Combination and (iii)
at least a majority of the members of the board of directors
of the corporation resulting from such Business Combination
were members of the Incumbent Board at the time of the
execution of the initial agreement, or of the action of the
Board, providing for such Business Combination; or
D. Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to have
occurred as a result of any transaction or series of transactions which I, or
any entity in which I am a partner, officer or more than 50% owner, initiate, if
immediately following the transaction or series of transactions that would
otherwise constitute a Change of Control, I, either alone or together with other
individuals who are executive officers of the Company immediately prior thereto,
beneficially own, directly or indirectly, more than 10% of the then outstanding
common shares of the Company or the corporation resulting from the transaction
or series of transactions, as applicable, or of the combined voting power of the
then outstanding voting securities of the Company or such resulting corporation.
10. MISCELLANEOUS. Unless otherwise expressly provided herein, terms
defined in the Plan shall have the same meanings when used in this Agreement.
The use of the masculine gender shall be deemed to include the feminine gender.
In the event of a conflict between this Agreement and the Plan, this Agreement
shall control. This Agreement represents the entire understanding between the
parties on the subject hereof and shall be governed in accordance with Ohio law.
Very truly yours,
By: ________________________________ Date: ___________________________
Mailing Address:
______________________________
______________________________
4
<PAGE>
ACCEPTED:
EATON CORPORATION
By: __________________________________ Date: ___________________________
Title: ________________________________
By: ___________________________________ Date: ___________________________
Title: _________________________________
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-12
<SEQUENCE>12
<FILENAME>l12544aexv12.txt
<DESCRIPTION>EX-12 RATIO OF EARNINGS TO FIXED CHARGES
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 12
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------
2004 2003 2002 2001 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes $ 781 $ 508 $ 399 $ 278 $ 552
Adjustments
- -----------
Minority interests in
consolidated subsidiaries 7 12 14 8 8
Income of equity investees 0 (3) (1) 0 (1)
Interest expensed 88 93 110 149 182
Amortization of debt issue costs 1 2 2 1 1
Estimated portion of rent expense
representing interest 38 38 34 38 39
Amortization of capitalized interest 17 13 13 13 10
Distributed income of equity
investees 3 0 0 0 1
----- ----- ----- ----- -----
Adjusted income from continuing
operations before income taxes $ 935 $ 663 $ 571 $ 487 $ 792
===== ===== ===== ===== =====
Fixed charges
- -------------
Interest expensed $ 88 $ 93 $ 110 $ 149 $ 182
Interest capitalized 7 7 8 12 22
Amortization of debt issue costs 1 2 2 1 1
Estimated portion of rent
representing interest 38 38 34 38 39
----- ----- ----- ----- -----
Total fixed charges $ 134 $ 140 $ 154 $ 200 $ 244
===== ===== ===== ===== =====
Ratio of earnings to fixed charges 6.98 4.73 3.71 2.44 3.25
</TABLE>
Income from continuing operations before income taxes for years before 2002
includes amortization expense related to goodwill and other intangible assets.
Upon adoption of Statement of Financial Accounting Standard No. 142 on January
1, 2002, Eaton ceased amortization of goodwill and indefinite life intangible
assets.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-21
<SEQUENCE>13
<FILENAME>l12544aexv21.txt
<DESCRIPTION>EX-21 SUBSIDIARIES
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 21
Subsidiaries of Eaton Corporation
Eaton is publicly held and has no parent corporation. Eaton's subsidiaries as of
December 31, 2004 and the state or country in which each was organized are as
follows:
<TABLE>
<CAPTION>
Consolidated subsidiaries (A) Where Organized
- ----------------------------- ---------------
<S> <C>
Eaton MDH Co. Inc. California
Aeroquip International Inc. Delaware
Eaton Administration Corporation Delaware
Eaton Aerospace LLC Delaware
Eaton Asia Investments Corporation Delaware
Eaton Electrical de Puerto Rico Inc. Delaware
Eaton Electrical Inc. Delaware
Eaton Hydraulics Inc. Delaware
Eaton International Corporation Delaware
Eaton MDH Limited Partnership Delaware
Eaton Power Quality Corporation Delaware
Eaton Power Quality Group Inc. Delaware
Eaton USEV Holding Company Delaware
ERC Corporation Delaware
ERC II Corporation Delaware
Intelligent Switchgear Organization LLC Delaware
Modern Molded Products, Inc. Delaware
U.S. Engine Valve Delaware
Vickers International Inc. Delaware
CAPCO Automotive Products Corporation Michigan
Eaton Aeroquip Inc. Michigan
Eaton Ann Arbor, Inc. Michigan
Eaton Inoac Company Michigan
Integrated Partial Discharge Diagnostics, Inc. Minnesota
Aeroquip-Vickers, Inc. Ohio
Eaton Electrical IDT Inc. Ohio
Eaton Leasing Corporation Ohio
Eaton Power Quality S.A. Argentina
Eaton Electric Systems Pty. Ltd. Australia
Eaton Finance Pty. Ltd. Australia
Eaton Finance G.P. Australia
Eaton Industries Pty. Ltd. Australia
Eaton Power Quality Pty. Ltd. Australia
Eaton Pty. Ltd. Australia
Vickers Systems Pty. Ltd. Australia
Eaton Holding G.m.b.H. Austria
Aeroquip Ltd. Barbados
Aeroquip-Vickers Assurance Ltd. Barbados
Eaton Holding Limited Barbados
Eaton Services Limited Barbados
Eaton Electric N.V. Belgium
Saturn Insurance Company Ltd. Bermuda Islands
Aeroquip do Brasil S.A. Brazil
Eaton Ltda. Brazil
Powerware Sistemas de Energia Ltda. Brazil
Saturnia Sistemas de Energia Ltda. Brazil
Aeroquip-Vickers Canada Inc. Canada
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Eaton ETN Offshore Ltd. Canada
Eaton Power Quality Limited Canada
Eaton Yale Ltd. Canada
Cutler-Hammer Company Cayman Islands
Cutler-Hammer Industries Ltd. Cayman Islands
Eaton Holding III Limited Cayman Islands
Georgetown Financial Services Ltd. Cayman Islands
Eaton China Investments Co., Ltd. China
Eaton Electrical (Suzhou) Co., Ltd. China
Eaton Fast Gear (Xi'an) Co., Ltd. China
Eaton Fluid Power (Jining) Co. Ltd. China
Eaton Fluid Power (Shanghai) Co. Ltd. China
Eaton Hydraulics Systems (Jining) Co. Ltd. China
Eaton Senstar Automotive Fluid Connectors (Shanghai)Co. China
Eaton Truck & Bus Components Company (Shanghai) Co. Ltd. China
Hangzhou Swichtec Co. Ltd. China
Eaton Power Quality (Shanghai) Company Ltd. China
Shanghai Eaton Engine Components Company, Ltd. China
Eaton Electrical S.A. Costa Rica
Eaton Industries s.r.o. Czech Republic
Eaton Holec, AS Denmark
Eaton Holec, OY Finland
Eaton Power Quality Oy Finland
Eaton Power Quality S.A. France
Eaton Power Solutions SAS France
Eaton S.A. France
Eaton Technologies S.A. France
Eaton Automotive G.m.b.H. Germany
Eaton Holding Investments G.m.b.H. & Co. KG Germany
Eaton G.m.b.H. & Co. K.G. Germany
Eaton Fluid Power G.m.b.H. Germany
Eaton Holding G.m.b.H. Germany
Eaton Power Quality G.m.b.H. Germany
Eaton Fluid Connectors G.m.b.H. Germany
Eaton Electric & Engineering Services, Limited Hong Kong
Eaton Power Quality Limited Hong Kong
Vickers Systems Limited Hong Kong
Eaton Industries Private Ltd. India
Eaton Power Quality Private Limited India
Vickers Systems International Ltd. India
Eaton Automotive Ltd. Ireland
Eaton Srl Italy
Eaton Fluid Power Srl Italy
Eaton Power Quality S.p.A. Italy
Eaton Fluid Power Limited Japan
Eaton Japan Co., Ltd. Japan
Eaton Holding S.a r.l. Luxembourg
Eaton Holding II S.a.r.l. Luxembourg
Eaton Electric Switchgear Sdn. Bhd. Malaysia
Eaton Electrical Manufacturing Holdings Sdn. Bhd. Malaysia
Eaton Power Systems Sdn. Bhd. Malaysia
Aeroquip de Mexico S.A. de C.V. Mexico
Aeroquip Servicios S.A. de C.V. Mexico
Controladora Aeroquip-Vickers de Mexico S.A. de C.V. Mexico
Eaton Electrical Mexicana, S.A. Mexico
Eaton Controls, S. de R.L. de C.V. Mexico
Eaton Finance, S. de R.L. de C.V. Mexico
Eaton Industries S. de R.L. de C.V. Mexico
Eaton Molded Products S. de R.L. de C.V. Mexico
Eaton Power Solutions, S. de R.L. de C.V. Mexico
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Eaton Truck Components, S. de R.L. de C.V. Mexico
Operaciones de Maquila de Juarez S. de R.L. de C.V. Mexico
Eaton s.a.m Monaco
Eaton Automotive B.V. Netherlands
Eaton B.V. Netherlands
Eaton C.V. Netherlands
Eaton Electric N.V. Netherlands
Eaton Finance B.V. Netherlands
Eaton Holding B.V. Netherlands
Eaton Holding I B.V. Netherlands
Eaton Holding II B.V. Netherlands
Eaton Holding International I B.V. Netherlands
Eaton International B.V. Netherlands
Holec Holland International B.V. Netherlands
Hydrowa B.V. Netherlands
Eaton Finance N.V. Netherlands Antilles
Eaton Power Quality Ltd. New Zealand
Vickers Systems Limited New Zealand
Aeroquip-Vickers International Inc. Panama
Eaton Automotive Components Spolka z o.o. Poland
Eaton Automotive Spolka z o.o. Poland
Eaton Automotive Systems Spolka z o.o. Poland
Eaton Truck Components Spolka z o.o. Poland
Nocadoli-SGPS Lda. Portugal (Madeira)
Aeroquip Singapore Pte. Limited Singapore
Vickers Systems Asia Pacific Pte. Ltd. Singapore
Aeroquip (South Africa) Pty. Ltd. South Africa
Eaton Truck Components (Pty.) Limited South Africa
Eaton Automotive Controls Limited South Korea
Eaton Limited South Korea
Aeroquip Iberica S.A. Spain
Eaton S.L Spain
Productos Eaton Livia S.A. Spain
Eaton Holec, AB Sweden
Eaton Power Quality AB Sweden
Eaton Global Sourcing G.m.b.H. Switzerland
Eaton Industries G.m.b.H. Switzerland
Eaton Electrical SA Switzerland
Modern Molded Products Limited Taiwan
Rubberon Technology Corporation Limited Thailand
Eaton Electric Limited United Kingdom
Eaton Electric Overseas Holding, Limited United Kingdom
Eaton Holding Limited United Kingdom
Eaton Limited United Kingdom
Eaton Power Quality Ltd. United Kingdom
Eaton Power Solutions Ltd. United Kingdom
Ultronics Limited United Kingdom
Eaton Electrical, S.A. Venezuela
</TABLE>
(A) Other Eaton subsidiaries, many inactive, are not listed above. If considered
in the aggregate, they would not be material.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23
<SEQUENCE>14
<FILENAME>l12544aexv23.txt
<DESCRIPTION>EX-23 CONSENT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration
Statements and related Prospectuses of our reports dated February 11, 2005, with
respect to the consolidated financial statements of Eaton Corporation, Eaton
Corporation management's assessment of the effectiveness of internal control
over financial reporting and the effectiveness of internal control over
financial reporting of Eaton Corporation, included in this Annual Report (Form
10-K) for the year ended December 31, 2004:
<TABLE>
<CAPTION>
Registration
Number Description Filing Date
- ------------ ----------- -----------
<C> <S> <C>
333-116974 Eaton Corporation Deferred Incentive Compensation
Plan - Form S-8 Registration Statement -
750,000 Shares June 29, 2004
333-116970 Eaton Corporation 2004 Stock Plan - Form S-8
Registration Statement - 7,000,000 Shares June 29, 2004
333-106764 Eaton Corporation - Form S-3 Registration
Statement - $250,000,000 of Debt Securities,
Debt Warrants, Preferred Shares and Common
Shares July 2, 2003
333-105786 Eaton Corporation - Form S-3 Registration
Statement - $47,850,000 of Common Shares June 3, 2003
333-104366 1996 Non-Employee Director Fee Deferral Plan -
Form S-8 Registration Statement April 8, 2003
333-104367 Eaton Savings Plan - Form S-8 Registration
Statement - 5,000,000 Shares April 8, 2003
333-97365 Eaton Corporation Incentive Compensation
Deferral Plan - Form S-8 Registration Statement July 30, 2002
333-97373 Cutler-Hammer de Puerto Rico Inc. Retirement
Savings Plan - Form S-8 Registration Statement July 30, 2002
333-97371 Eaton Corporation 2002 Stock Plan - Form S-8
Registration Statement July 30, 2002
333-43876 Eaton Corporation 401(k) Savings Plan - Form
S-8 Registration Statement - 500,000 Shares August 16, 2000
333-35946 Deferred Incentive Compensation Plan - Form
S-8 Registration Statement - 375,000 Shares May 1, 2000
333-86389 Eaton Corporation Executive Strategic Incentive
Plan - Form S-8 Registration Statement Sept. 2, 1999
333-77245 Eaton Corporation 401(k) Savings Plan -
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
Form S-8 Registration Statement April 28, 1999
333-77243 Eaton Corporation Share Purchase and Investment
Plan - Form S-8 Registration Statement April 28, 1999
333-74355 Eaton Corporation $1,400,000,000 of Debt
Securities, Debt 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) March 12, 1999
333-62375 Eaton Corporation 1998 Stock Plan -
Form S-8 Registration Statement August 27, 1998
333-62373 Eaton Holding Limited U.K. Savings - Related
Share Option Scheme [1998] - Form S-8
Registration Statement August 27, 1998
333-35697 Cutler-Hammer de Puerto Rico Company Retirement
Savings Plan - Form S-8 Registration Statement Sept. 16, 1997
333-28869 Eaton 401(k) Savings Plan and Trust -
Form S-8 Registration Statement June 10, 1997
333-25693 Eaton Corporation Shareholder Dividend Reinvest-
ment Plan - Form S-3 Registration Statement April 23, 1997
333-23539 Eaton Non-Employee Director Fee Deferral Plan -
Form S-8 Registration Statement March 18, 1997
333-22597 Eaton Incentive Compensation Deferral Plan -
Form S-8 Registration Statement March 13, 1997
333-03599 Eaton Corporation Share Purchase and Investment
Plan - Form S-8 Registration Statement May 13, 1996
333-01365 Eaton Corporation Incentive Compensation Deferral
Plan - Form S-3 Registration Statement March 1, 1996
33-64201 Eaton Corporation $120,837,500 of Debt Securities
and Debt Warrants - Form S-3 Registration
Statement Nov. 14, 1995
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 Warrants, Common Shares and Preferred Shares
- Form S-3 Registration Statement Feb. 18, 1994
33-49393& Eaton Corporation Stock Option Plans - Form S-8
33-12842 Registration Statement March 9, 1993
</TABLE>
/s/ Ernst & Young LLP
---------------------
Cleveland, Ohio
March 10, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-24
<SEQUENCE>15
<FILENAME>l12544aexv24.txt
<DESCRIPTION>EX-24 POWER OF ATTORNEY
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(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, Richard H. Fearon, 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,
2004 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, 2005.
IN WITNESS WHEREOF, this Power of Attorney has been signed at Cleveland,
Ohio this 23rd day of February 2005.
/s/ Alexander M. Cutler /s/ Richard H. Fearon
- ------------------------------------- ----------------------------------------
Alexander M. Cutler, Chairman Richard H. Fearon,
and Chief Executive Officer; Executive Vice President--Chief
President; Principal Executive Financial and Planning Officer;
Officer; Director Principal Financial Officer
/s/ Billie K. Rawot /s/ Michael J. Critelli
- ------------------------------------- ----------------------------------------
Billie K. Rawot, Michael J. Critelli, Director
Vice President and Controller;
Principal Accounting Officer
/s/ Ernie Green /s/ Ned C. Lautenbach
- ------------------------------------- ----------------------------------------
Ernie Green, Director Ned C. Lautenbach, Director
/s/ Deborah L. McCoy /s/ John R. Miller
- ------------------------------------- ----------------------------------------
Deborah L. McCoy, Director John R. Miller, Director
/s/ Gregory R. Page /s/ Kiran M. Patel
- ------------------------------------- ----------------------------------------
Gregory R. Page, Director Kiran M. Patel, Director
/s/ Victor A. Pelson /s/ Gary L. Tooker
- ------------------------------------- ----------------------------------------
Victor A. Pelson, Director Gary L. Tooker, Director
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>16
<FILENAME>l12544aexv31w1.txt
<DESCRIPTION>EX-31.1 CERT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 31.1
Certification
I, Alexander M. Cutler, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
<PAGE>
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 10, 2005 /s/ Alexander M. Cutler
----------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>17
<FILENAME>l12544aexv31w2.txt
<DESCRIPTION>EX-31.2 CERT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 31.2
Certification
I, Richard H. Fearon, certify that:
1. I have reviewed this annual report on Form 10-K of Eaton Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
<PAGE>
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 10, 2005 /s/ Richard H. Fearon
----------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>18
<FILENAME>l12544aexv32w1.txt
<DESCRIPTION>EX-32.1 CERT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 32.1
Certification
This written statement is submitted in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Annual Report on
Form 10-K for the year ended December 31, 2004 ("10-K Report").
I hereby certify that, based on my knowledge, the 10-K Report fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C 78m), and information contained in the 10-K Report fairly presents, in
all material respects, the financial condition and results of operations of
Eaton Corporation and its consolidated subsidiaries.
Date: March 10, 2005 /s/ Alexander M. Cutler
----------------------------------------
Alexander M. Cutler
Chairman and Chief Executive Officer
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>19
<FILENAME>l12544aexv32w2.txt
<DESCRIPTION>EX-32.2 CERT
<TEXT>
<PAGE>
Eaton Corporation
2004 Annual Report on Form 10-K
Item 15(c)
Exhibit 32.2
Certification
This written statement is submitted in accordance with Section 906 of the
Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Annual Report on
Form 10-K for the year ended December 31, 2004 ("10-K Report").
I hereby certify that, based on my knowledge, the 10-K Report fully complies
with the requirements of Section 13(a) of the Securities Exchange Act of 1934
(15 U.S.C 78m), and information contained in the 10-K Report fairly presents, in
all material respects, the financial condition and results of operations of
Eaton Corporation and its consolidated subsidiaries.
Date: March 10, 2005 /s/ Richard H. Fearon
----------------------------------------
Richard H. Fearon
Executive Vice President -
Chief Financial and Planning Officer
</TEXT>
</DOCUMENT>
</SEC-DOCUMENT>
-----END PRIVACY-ENHANCED MESSAGE-----