-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Py9ug3taYCJmJBmgIcGCEsamo1h1tFQ3wn/BepG2laquahMuK/eCDWoWOIJajBnj 7LRX2vfYiXTwI5qqVm3smQ== 0000950152-04-003752.txt : 20040507 0000950152-04-003752.hdr.sgml : 20040507 20040507162932 ACCESSION NUMBER: 0000950152-04-003752 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20040331 FILED AS OF DATE: 20040507 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-56644 FILM NUMBER: 04789542 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 10-Q 1 l06915ae10vq.txt EATON CORPORATION 10-Q United States Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2004 Commission file number 1-1396 Eaton Corporation ------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-0196300 ------------------------------------------------------------- (State of incorporation) (I.R.S. Employer Identification No.) Eaton Center, Cleveland, Ohio 44114-2584 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (216) 523-5000 ------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] There were 150.6 million Common Shares outstanding as of March 31, 2004. PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - ---------------------------- Eaton Corporation Statements of Consolidated Income
Three months ended March 31 --------------------- (Millions except for per share data) 2004 2003 ---- ---- Net sales $2,238 $1,925 Cost of products sold 1,621 1,415 Selling & administrative expense 361 329 Research & development expense 60 55 Interest expense-net 19 24 Other (income) expense-net 4 3 ------ ------ Income before income taxes 173 99 Income taxes 39 27 ------ ------ Net income $ 134 $ 72 ====== ====== Net income per Common Share assuming dilution $ 0.85 $ 0.50 Average number of Common Shares outstanding 157.1 144.2 Net income per Common Share basic $ 0.87 $ 0.51 Average number of Common Shares outstanding 153.1 142.3 Cash dividends paid per Common Share $ 0.27 $ 0.22
Net income per Common Share, average number of Common Shares outstanding and cash dividends paid per Common Share have been adjusted retroactively to reflect the two-for-one stock split effective February 23, 2004. See accompanying notes. 2 Eaton Corporation Condensed Consolidated Balance Sheets
Mar. 31, Dec. 31, (Millions) 2004 2003 ---- ---- ASSETS Current assets - -------------- Cash $ 65 $ 61 Short-term investments 514 804 Accounts receivable 1,399 1,190 Inventories 751 721 Deferred income taxes & other current assets 330 317 ------ ------ 3,059 3,093 Property, plant & equipment-net 2,030 2,076 Goodwill 2,086 2,095 Other intangible assets 541 541 Deferred income taxes & other assets 477 418 ------ ------ $8,193 $8,223 ====== ====== LIABILITIES & SHAREHOLDERS' EQUITY Current liabilities - ------------------- Short-term debt & current portion of long-term debt $ 300 $ 302 Accounts payable 630 526 Accrued compensation 176 204 Accrued income & other taxes 295 298 Other current liabilities 811 796 ------ ------ 2,212 2,126 Long-term debt 1,662 1,651 Postretirement benefits other than pensions 632 636 Pensions & other liabilities 644 693 Shareholders' equity 3,043 3,117 ------ ------ $8,193 $8,223 ====== ======
See accompanying notes. 3 Eaton Corporation Condensed Statements of Consolidated Cash Flows
Three months ended March 31 ------------------- (Millions) 2004 2003 ---- ---- Net cash provided by (used in) operating activities - --------------------------------------------------- Net income $ 134 $ 72 Adjustments to reconcile to net cash provided by operating activities Depreciation & amortization 100 98 Changes in operating assets & liabilities, excluding acquisitions & sales of businesses (171) (204) Contribution to U.S. qualified pension plans (75) Other-net 39 30 ----- ----- 27 (4) ----- ----- Net cash provided by investing activities - ----------------------------------------- Expenditures for property, plant & equipment (49) (43) Acquisitions of businesses, less cash acquired (16) (219) Net decrease in short-term investments 291 314 Other-net (10) (10) ----- ----- 216 42 ----- ----- Net cash used in financing activities - ------------------------------------- Borrowings with original maturities of less than three months-net (3) (29) Cash dividends paid (41) (31) Proceeds from exercise of employee stock options 55 6 Purchase of Common Shares (250) - ----- ----- (239) (54) ----- ----- Total increase (decrease) in cash 4 (16) Cash at beginning of period 61 75 ----- ----- Cash at end of period $ 65 $ 59 ===== =====
See accompanying notes. 4 Notes To Condensed Consolidated Financial Statements - ---------------------------------------------------- Dollars in millions, except for per share data (per share data assume dilution) Preparation of Financial Statements - ----------------------------------- The condensed consolidated financial statements of Eaton Corporation (Eaton or the Company) are unaudited. However, in the opinion of management, all adjustments have been made which are necessary for a fair presentation of financial position, results of operations and cash flows for the stated periods. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's 2003 Annual Report on Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Two-For-One Stock Split - ----------------------- On January 21, 2004, Eaton announced 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 it was distributed on February 23, 2004. Accordingly, all per share amounts, average shares outstanding, and shares outstanding have been adjusted retroactively to reflect the stock split. Subsequent Event - ---------------- On April 27, 2004, Eaton announced it signed an agreement with Invensys plc to purchase its power systems business, Powerware Corporation, for $560 in cash. The transaction is expected to close by the end of second quarter 2004, following regulatory review and the approval of Invensys shareholders. Powerware, based in Raleigh, N.C., is a global market leader in Uninterruptible Power Systems (UPS), DC power products, and power quality services. Powerware had estimated revenues of $775 for the year ended March 31, 2004 and has operations in the United States, Europe and in the Asia/Pacific area that provide products and services that are utilized by computer manufacturers, industrial companies, governments, telecommunications firms, medical institutions, data centers and other businesses. Powerware offers a full line of UPS products (three-phase and single-phase) and DC power systems, power management software, remote monitoring, integration services and site support. This business will be included in the Electrical segment. Eaton expects to finance this acquisition principally with cash on hand at closing, supplemented as needed with short-term debt. Acquisition of Business - ----------------------- On January 31, 2003, Eaton acquired the electrical division of Delta plc for approximately $215. First quarter 2003 includes only two months of sales and operating results for this business. This business has operations in Europe and in the Asia/Pacific area and had sales of $326 in 2002. This business is included in the Electrical segment. Restructuring Charges - --------------------- In 2004 and 2003, Eaton incurred restructuring charges related primarily to the integration of the Boston Weatherhead fluid power business acquired in November 2002 and the electrical division of Delta plc acquired in January 2003. A summary of these charges follows: 5
Three months ended March 31 ------------------ 2004 2003 ---- ---- Fluid Power $ 1 $ 5 Electrical 5 1 ----- ----- 6 6 Corporate - 1 ----- ----- Total pretax charges $ 6 $ 7 ===== ===== After-tax charges $ 4 $ 5 Per Common Share $0.03 $0.03
The restructuring charges are 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 are included in Other corporate expense-net, as appropriate. Utilization of restructuring charges for first quarter 2004 follows:
Plant consolidation & other ------------- Balance remaining at December 31, 2003 $ 10 2004 charges 6 Utilized in 2004 (8) ---- Balance remaining at March 31, 2004 $ 8 ====
Retirement Benefit Plans - ------------------------ Pretax income for first quarter 2004 was reduced by $4 ($3 after-tax, or $0.02 per Common Share) compared to first quarter 2003 due to increased pension and other postretirement benefit costs in 2004 resulting 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. Also, during January 2004 Eaton made a voluntary contribution of $75 to its United States qualified pension plans. 6 The components of benefit costs follow:
Three months ended March 31 ----------------------------------- Other postretirement Pension benefits benefits ---------------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Service cost $ 24 $ 24 $ 4 $ 4 Interest cost 34 34 13 14 Expected return on plan assets (45) (47) - - Other 7 1 2 2 ---- ---- ---- ---- 20 12 19 20 Settlement loss 7 10 - - ---- ---- ---- ---- $ 27 $ 22 $ 19 $ 20 ==== ==== ==== ====
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was passed on December 8, 2003, subsequent to the November 30 measurement of the Company's other postretirement benefit plans. The Act provides for prescription drug benefits under Medicare Part D and contains a subsidy to plan sponsors who provide "actuarially equivalent" prescription plans. In accordance with Financial Accounting Standards Board (FASB) Staff Position FAS 106-1, Eaton has elected not to defer accounting for the effect of the Act and adopted the accounting guidance in FAS 106-1 in first quarter 2004. As a result, in first quarter 2004 the accumulated postretirement benefit obligation decreased by $51, with an offsetting change in unrecognized net actuarial loss. The reduction in the accumulated postretirement benefit obligation is attributable to the federal subsidy and an expected reduction in the number of retirees electing coverage under the Company's other postretirement benefit plans. The Act will reduce other postretirement benefit costs by $6 in 2004, comprised of $3 of service and interest cost and $3 of amortization of unrecognized net actuarial loss. A prescription drug benefit plan must be "actuarially equivalent" in order to qualify for the subsidy. While the United States Department of Health and Human Services has not yet defined the tests for "actuarially equivalent" prescription plans, Eaton has certain plans that are non-contributory and that the Company believes will satisfy the actuarially equivalence test and will receive the subsidy. The reduction in the accumulated postretirement benefit obligation and ongoing net periodic other postretirement 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 the accumulated postretirement benefit obligation and ongoing net periodic other postretirement cost. The FASB is in the process of developing specific authoritative guidance on accounting for the federal subsidy and that guidance, when issued, could require the Company to change previously reported financial information. Income Taxes - ------------ The effective income tax rate for first quarter 2004 was 22.5% compared to 27.0% for first quarter 2003 and 24.0% for full-year 2003. The lower rate in 2004 reflects many factors, including higher earnings in international tax jurisdictions with lower income tax rates and increased use of international tax credit carryforwards. 7 Repurchase of Common Shares - --------------------------- 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. Net Income per Common Share - --------------------------- A summary of the calculation of net income per Common Share, based on the number of shares outstanding assuming dilution and the basic number of shares outstanding, follows (shares in millions):
Three months ended March 31 ------------------- 2004 2003 ---- ---- Net income $ 134 $ 72 ====== ====== Average number of Common Shares outstanding assuming dilution 157.1 144.2 Less dilutive effect of stock options 4.0 1.9 ------ ------ Average number of Common Shares outstanding basic 153.1 142.3 ====== ====== Net income per Common Share assuming dilution $ 0.85 $ 0.50 Net income per Common Share basic 0.87 0.51
Stock Options - ------------- 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:
Three months ended March 31 ------------------ 2004 2003 ---- ---- Net income - ---------- As reported $ 134 $ 72 Stock-based compensation expense, net of income taxes (3) (3) ------ ------ Assuming fair-value-method $ 131 $ 69 ====== ====== Net income per Common Share assuming dilution - --------------------------- As reported $ 0.85 $ 0.50 Stock-based compensation expense, net of income taxes (0.02) (0.02) ------ ------ Assuming fair-value-method $ 0.83 $ 0.48 ====== ======
8 Net income per Common Share basic - --------------------------------- As reported $ 0.87 $ 0.51 Stock-based compensation expense, net of income taxes (0.02) (0.02) ------ ------ Assuming fair-value-method $ 0.85 $ 0.49 ====== ======
Comprehensive Income - -------------------- Comprehensive income is as follows:
Three months ended March 31 ------------------ 2004 2003 ---- ---- Net income $134 $ 72 Foreign currency translation 3 8 Cash flow hedges (2) 7 ---- ---- Comprehensive income $135 $ 87 ==== ====
Inventories - ----------- The components of inventories follow:
Mar. 31, Dec. 31, 2004 2003 ---- ---- Raw materials $345 $301 Work-in-process & finished goods 440 452 ---- ---- Inventories at FIFO 785 753 Excess of FIFO over LIFO cost (34) (32) ---- ---- $751 $721 ==== ====
9 Business Segment Information - ----------------------------
Three months ended March 31 ------------------ 2004 2003 ---- ---- Net sales - --------- Fluid Power $ 768 $ 697 Electrical 611 514 Automotive 478 440 Truck 381 274 ------ ------ $2,238 $1,925 ====== ====== Operating profit - ---------------- Fluid Power $ 81 $ 58 Electrical 45 32 Automotive 69 62 Truck 61 22 ------ ------ 256 174 Corporate - --------- Amortization of intangible assets (6) (6) Interest expense-net (19) (24) Minority interest (3) (3) Pension & other postretirement benefit expense (18) (14) Other corporate expense-net (37) (28) ------ ------ Income before income taxes 173 99 Income taxes 39 27 ------ ------ Net income $ 134 $ 72 ====== ======
10 Item 2. Management's Discussion & Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Dollars in millions, except for per share data (per share data assume dilution) Two-For-One Stock Split - ----------------------- On January 21, 2004, Eaton announced 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 it was distributed on February 23, 2004. Accordingly, all per share amounts, average shares outstanding, and shares outstanding have been adjusted retroactively to reflect the stock split. Overview of the Company - ----------------------- Eaton is a diversified industrial manufacturer that is a global leader in the design, manufacture and marketing of fluid power systems and services for industrial, mobile and aircraft equipment; electrical systems and components for power quality, distribution and control; automotive engine air management systems and powertrain controls for fuel economy; and intelligent drivetrain systems for fuel economy and safety in trucks. The principal markets for the Fluid Power, Automotive and Truck segments are original equipment manufacturers and after-market customers of aerospace products and systems, off-highway agricultural and construction vehicles, industrial equipment, passenger cars and heavy-, medium-, and light-duty trucks. The principal markets for the Electrical segment are industrial, construction, commercial, automotive and government customers. The Company had 51,000 employees at the end of first quarter 2004 and sells products to customers in more than 100 countries. Highlights of Results for 2004 - ------------------------------ The Company's operating results for first quarter 2004 and 2003 are summarized as follows:
Three months ended March 31 --------------------------- 2004 2003 Increase ---- ---- -------- Net sales $2,238 $1,925 16% Net income 134 72 86% Net income per Common Share assuming dilution $ 0.85 $ 0.50 70%
Net sales in first quarter 2004 were a new quarterly record. The Company achieved record levels of shipments in 2004 in spite of end markets being approximately 12% below the peak of several years ago. Eaton's end markets grew 6% in first quarter 2004 and, adjusting for the effects of foreign exchange, the Company outgrew its end markets by 4% during the quarter. Sales growth in 2004 also reflected increased sales resulting from recent business acquisitions and new joint ventures. The increase in net income during first quarter 2004 was primarily due to higher sales 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 significantly higher net income in first quarter 2004. These increases were partially offset by higher costs for pensions and other postretirement benefits in first quarter 2004. As a result of actions 11 taken in 2004 and 2003 to restructure operations and integrate acquired businesses, Eaton incurred restructuring charges of $0.03 per Common Share in each of first quarter 2004 and 2003. Business segment operating profit of $256 in first quarter 2004 was 11.4% of sales compared to 9.0% in first quarter 2003. Operating margins were reduced by 0.3% in 2004 and 0.4% in first quarter 2003, due to restructuring charges. During first quarter 2004, cash generated from operating activities was $27. Before a $75 voluntary contribution to the United States qualified pension plans, operating activities generated cash of $102 in first quarter 2004. Management believes cash flow from operating activities before this pension contribution is a useful performance measure; this contribution is considered unusual in nature because a similar pension contribution has not been made in over a decade. Historically for the Company, the first quarter of each year generates less cash flow from operations than other quarters of the year. Capital expenditures of $49 in first quarter 2004 compared to $43 in first quarter 2003. The net-debt-to-total-capital ratio increased to 31.2% at March 31, 2004 from 25.9% at year-end 2003, primarily due to the $290 decline in short-term investments, which reflected the $75 contribution to the pension plans and the repurchase during the quarter of 4.2 million Common Shares at a total cost of $250. Based on a survey of its end markets in mid-April 2004, Eaton now anticipates that its end markets in 2004 will grow between 5 to 6% compared to the original expectation of 4%. Mobile hydraulics markets, in particular, are stronger than had been anticipated, as are residential electrical markets. Partially offsetting these stronger markets is the nonresidential construction electrical market, which is weaker than anticipated. Accordingly, in mid-April Eaton raised its guidance for full-year 2004 net income per Common Share by $0.50, to between $3.65 and $3.80. The Company anticipates net income per share for second quarter 2004 to be between $0.90 and $1.00. These per share amounts are net of restructuring charges of $0.10 for full-year 2004 and $0.05 for second quarter 2004. On April 27, 2004, Eaton announced that it signed an agreement with Invensys plc to purchase its power systems business, Powerware Corporation. The Company expects the acquisition of Powerware to be accretive to earnings starting in 2004. Accordingly, Eaton raised its guidance for full-year 2004 net income per Common Share by an additional $0.05 above its mid-April guidance to between $3.70 and $3.85. The incremental per share amount of $0.05 is net of restructuring charges related to the acquisition of Powerware of $0.05 per share. Results of Operations - 2004 Compared to 2003 - ---------------------------------------------
Three months ended March 31 --------------------------- Net sales 2004 2003 Increase - --------- ---- ---- -------- Fluid Power $ 768 $ 697 10% Electrical 611 514 19% Automotive 478 440 9% Truck 381 274 39% ------ ------ $2,238 $1,925 16% ====== ======
Sales for first quarter 2004 were up sharply compared to first quarter 2003. Sales growth of 16% in 2004 consisted of 2% from recent business acquisitions and a new joint venture, 4% from higher foreign exchange rates, and 10% from organic growth. Organic growth was made up of 6% growth in end markets and 4% growth, or almost $80, from outgrowing end markets. The operating results of each business segment are further discussed below. 12 In first quarter 2004 and 2003, Eaton incurred restructuring charges related primarily to the integration of the Boston Weatherhead fluid power business acquired in November 2002 and the electrical division of Delta plc acquired in January 2003. For the Fluid Power segment, these charges were $1 in first quarter 2004 compared to $5 in first quarter 2003. For the Electrical segment, these charges were $5 in first quarter 2004 compared to $1 in first quarter 2003. For Corporate, there were no charges in first quarter 2004 compared to $1 in first quarter 2003. Restructuring charges are 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 of the related business segment or are included in Other corporate expense-net, as appropriate. Pretax income for first quarter 2004 was reduced by $4 ($3 after-tax, or $0.02 per Common Share) compared to first quarter 2003 due to increased pension and other postretirement benefit costs in 2004 resulting 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. The effective income tax rate for first quarter 2004 was 22.5% compared to 27.0% for first quarter 2003 and 24.0% for full-year 2003. The lower rate in 2004 reflects many factors including higher earnings in international tax jurisdictions with lower income tax rates and increased use of international tax credit carryforwards. Results by Business Segment - ---------------------------
Three months ended March 31 --------------------------- Fluid Power 2004 2003 Increase - ----------- ---- ---- -------- Net sales $ 768 $697 10% Operating profit 81 58 40% Operating margin 10.5% 8.3% 27%
First quarter 2004 sales of Fluid Power, Eaton's largest business segment, were an all-time quarterly record. The increase in sales compares to an increase of 8% in Fluid Power's markets, with North American fluid power industry shipments up 10%, commercial aerospace markets up 6%, and defense aerospace markets up 13%. Mobile and industrial hydraulics markets had strong growth in both sales and orders during first quarter 2004. The Company anticipates the growth in mobile hydraulics is likely to continue throughout 2004. Commercial and defense aerospace markets were also a bit stronger than expected in first quarter 2004. Operating profit in first quarter 2004 was an all-time quarterly record. Increased operating profit in 2004 was primarily due to higher sales, the benefits of restructuring actions taken in recent years to resize this business and reduced restructuring charges in 2004. Restructuring charges in 2004 were $1 compared to $5 in first quarter 2003 and related primarily to the acquisition of the Boston Weatherhead business in late 2002. Restructuring charges reduced operating margins by 0.1% in first quarter 2004 and 0.7% in first quarter 2003. 13
Three months ended March 31 --------------------------- Electrical 2004 2003 Increase - ---------- ---- ---- -------- Net sales $611 $514 19% Operating profit 45 32 41% Operating margin 7.4% 6.2% 19%
In the Electrical segment, first quarter 2004 sales were up substantially from first quarter 2003. Sales growth in 2004 included 7% from the acquisition of the electrical division of Delta plc and the joint venture formed in August 2003 with Caterpillar. End markets for the electrical business grew about 2% during first quarter 2004. End market growth appears to be accelerating modestly, but significant pockets of weakness still exist, particularly for larger industrial and commercial projects. Increased operating profit in first quarter 2004 was primarily due to higher sales and the benefits of restructuring actions taken in recent years to resize this business and integrate acquired businesses, partially offset by increased restructuring charges in first quarter 2004. Restructuring charges recorded in 2004 were $5 compared to $1 in first quarter 2003, and related to the acquired businesses. Restructuring charges reduced operating margins by 0.8% in first quarter 2004 and 0.2% in first quarter 2003. On April 27, 2004, Eaton announced it signed an agreement with Invensys plc to purchase its power systems business, Powerware Corporation, for $560 in cash. The transaction is expected to close by the end of the second quarter, following regulatory review and the approval of Invensys shareholders. Powerware, based in Raleigh, N.C., is a global market leader in Uninterruptible Power Systems (UPS), DC power products, and power quality services. Powerware had estimated revenues of $775 for the year ended March 31, 2004 and has operations in the United States, Europe and in the Asia/Pacific area that provide products and services that are utilized by computer manufacturers, industrial companies, governments, telecommunications firms, medical institutions, data centers and other businesses. Powerware offers a full line of UPS products (three-phase and single-phase) and DC power systems, power management software, remote monitoring, integration services and site support. In March 2004, Eaton announced the acquisition of the Electrum Group Ltd., a New Jersey-based company that provides power management services and web-based software for telecommunications, data center and government applications. Electrum had $3.1 of sales in 2003. Electrum, while small in size, significantly expands the Company's capabilities to serve the telecommunications, data center and government power markets.
Three months ended March 31 --------------------------- Automotive 2004 2003 Increase - ---------- ---- ---- -------- Net sales $ 478 $ 440 9% Operating profit 69 62 11% Operating margin 14.4% 14.1% 2%
The Automotive segment posted strong revenue growth in first quarter 2004 despite flat markets, reflecting the significant product and platform wins generated by the business over the last couple of years. Automotive production in NAFTA and in Europe was flat in 2004 compared to first quarter 2003. Eaton 14 continues to expect that, for 2004 as a whole, both the NAFTA and Europe automobile markets will be flat. Increased operating profit was the result of increased sales in 2004. 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.
Three months ended March 31 --------------------------- Truck 2004 2003 Increase - ----- ---- ---- -------- Net sales $ 381 $274 39% Operating profit 61 22 177% Operating margin 16.0% 8.0% 100%
The Truck segment posted sales in first quarter 2004 that were up sharply compared to first quarter 2003. In first quarter 2004, NAFTA heavy-duty truck production of 53,000 units was up 48% and NAFTA medium-duty truck production was up 22% compared to first quarter 2003. European truck production was down 2% and Brazilian vehicle production was up 14%. Monthly orders for new NAFTA heavy-duty trucks during first quarter 2004 have been running above 30,000 units. As a result, Eaton is growing increasingly confident that the NAFTA heavy-duty market in 2004 is likely to total at least 240,000 units. Operating profit in first quarter 2004 was nearly three times the operating profit earned in first quarter 2003. Increased operating profit in 2004 was primarily due to increased sales in first quarter 2004 and the benefits of the new operating model implemented by Truck in recent years. In March 2004, Eaton announced that it signed an agreement to form a 50%-owned joint venture with FAW Jiefang Automotive Co., Ltd., in Changchun, China to produce a complete line of medium-duty transmissions for commercial vehicles and buses for the growing Chinese market. FAW Jiefang Automotive Co., Ltd. is the commercial vehicle subsidiary of China First Auto Works Group Company (FAW) which is the largest manufacturer of commercial vehicles in China. Eaton and FAW Jiefang will have equal ownership of the joint venture, which will be called FAW Eaton Transmission Co., Ltd. The venture is expected to receive Chinese government approval in the next few months with production expected to begin this summer. Changes in Financial Condition During 2004 - ------------------------------------------ Net working capital of $847 at March 31, 2004 decreased from $967 at year-end 2003. The current ratio was 1.4 at March 31, 2004 and December 31, 2003. The decrease in net working capital was primarily due to a reduction in short-term investments which reflected a $75 contribution to the United States qualified pension plans and the repurchase of 4.2 million Common Shares at a total cost of $250, offset by higher accounts receivable resulting from increased sales in first quarter 2004. During first quarter 2004, cash generated from operating activities was $27. Before a $75 voluntary contribution to the United States qualified pension plans, operating activities generated cash of $102 in 2004. Management believes cash flow from operating activities before this pension contribution is a useful performance measure; this contribution is considered unusual in nature because a similar pension contribution has not been made in over a decade. Historically for the Company, the first quarter of each year generates less cash flow from operations than other quarters of the year. Expenditures for property, plant and equipment for first quarter 2004 were $49 compared to $43 for first quarter 2003. 15 Total debt of $1,962 at March 31, 2004 increased slightly from $1,953 at the end of 2003. The net-debt-to-capital ratio increased to 31.2% at March 31 from 25.9% at year-end 2003, primarily due to the $290 reduction of short-term investments, which reflected the $75 contribution to the pension plans and the repurchase of 4.2 million Common Shares at a total cost of $250. In March 2004, Eaton entered into a new $50 revolving credit facility which will expire in May 2008. Eaton has long-term credit facilities of $700, of which $400 expire in April 2005 and the remaining $300 in May 2008. As discussed above in the notes to the condensed consolidated financial statements, on April 27, 2004, Eaton announced that it signed an agreement with Invensys plc to purchase its power systems business, Powerware Corporation, for $560 in cash. The Company expects to finance this acquisition principally with cash on hand at closing, supplemented as needed with short-term debt. Forward-Looking Statements - -------------------------- This Form 10-Q contains forward-looking statements concerning the second quarter 2004 and full year 2004 net income per share and Eaton's worldwide markets. 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, energy 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; new laws and governmental regulations; interest rate changes; stock market fluctuations; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements. Item 3. Quantitative and Qualitative Disclosures about Market Risk - ------------------------------------------------------------------ A discussion of market risk exposures is included in Part II, Item 7A, "Quantitative and Qualitative Disclosure about Market Risk", of Eaton's 2003 Annual Report on Form 10-K. There have been no material changes in reported market risk since the inclusion of this discussion in the Company's 2003 Annual Report on Form 10-K referenced above. Item 4. 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 March 31, 2004. Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the Exchange Act) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures 16 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. PART II - OTHER INFORMATION --------------------------- Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities - -----------------------------------------------------------------------------
Total Maximum number number (or of shares approximate purchased dollar value) Total Average as part of of shares number price publicly that may yet of shares paid announced be purchased Month purchased per share plans under the plans - ----- --------- --------- ---------- --------------- January 2004 685,200 $59.35 685,200 February 2004 2,296,100 58.80 2,296,100 March 2004 1,267,700 58.26 1,267,700 --------- ------ --------- ------------- 4,249,000 $58.73 4,249,000 $417 million* ========= ====== ========= =============
On January 21, 2004, Eaton announced a plan to repurchase 4.2 million Common Shares to offset the shares issued during 2003 from the exercise of stock options. During first quarter 2004, Eaton completed the plan by repurchasing 4,249,000 shares at an average price of $58.73 per share, for a total cost of $250. *The remainder of the Company's share repurchase authorizations, which were originally granted by the Company's Board of Directors in 2000, is $417 million. However, it does not intend to use that authority other than, from time to time and depending on circumstances, to help offset dilution resulting from shares issued as a result of stock options exercised over the course of 2004. Item 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- At Eaton's Annual Meeting of Shareholders on April 28, 2004, the shareholders re-elected three directors (Michael J. Critelli, Ernie Green and Kiran M. Patel), approved the 2004 Stock Plan and ratified the appointment of the accounting firm of Ernst & Young LLP as the Company's independent auditors for 2004. Results of voting in connection with each issue were as follows:
Voting on Directors For Withheld Total - ------------------- --- -------- ----- Michael J. Critelli 136,811,217 6,533,876 143,345,093 Ernie Green 136,810,943 6,534,150 143,345,093 Kiran M. Patel 141,666,108 1,678,985 143,345,093
17 2004 Stock Plan - --------------- For 95,982,013 Against 30,279,724 Abstain 1,798,426 No vote 15,284,930 ----------- Total 143,345,093 ===========
Ratification of Ernst & Young LLP as Independent Auditors - --------------------------------------------------------- For 139,960,514 Against 2,482,145 Abstain 902,434 ----------- Total 143,345,093 ===========
Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) Exhibits - See Exhibit Index attached. (b) Reports on Form 8-K. 1. On January 21, 2004, Eaton filed a Current Report on Form 8-K regarding the fourth quarter 2003 earnings release. 2. On April 5, 2004, Eaton filed a Current Report on Form 8-K regarding 1) an amendment to the Company's Definitive Proxy Statement dated March 19, 2004 in regard to compensation paid to an executive officer and 2) summarized information concerning stock options outstanding and exercisable at March 1, 2004. 3. On April 14, 2004, Eaton filed a Current Report on Form 8-K regarding the first quarter 2004 earnings release. 18 Signature Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Eaton Corporation ----------------------------------- Registrant Date: May 7, 2004 /s/ Richard H. Fearon ----------------------------------- Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 19 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Exhibit Index Exhibit - ------- 4 Instruments defining rights of security holders, including indentures (Pursuant to Regulation to S-K Item 601(b)(4), Eaton agrees to furnish to the Commission, upon request, a copy of the instruments defining the rights of holders of long-term debt) 10 Material contracts - Each of the following is either a management contract or a compensatory plan or arrangement: (a) 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) (b) Plan for Deferred Payment of Directors' Fees (originally adopted in 1980 and amended and restated in 1989, 1996 and 2002) (c) 1996 Non-Employee Director Fee Deferral Plan 12 Ratio of Earnings to Fixed Charges 31.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) 31.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) 32.1 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) 32.2 Certification of Form 10-Q (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) 20 EX-10.A 2 l06915aexv10wa.txt EXHIBIT 10(A) Exhibit 10(a) Eaton Corporation 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) 21 ARTICLE I ESTABLISHMENT OF PLAN 1.01 "Establishment of Plan and Effective Date": Eaton Corporation (the "Company") has established this Plan for the Deferred Payment of Directors' Fees(the "Plan") effective as of October 23, 1985. The Plan was amended and restated as of September 24, 1996, January 28, 1998, January 23, 2002 and February 24, 2004. 1.02 "Statement of Purpose": It is the purpose of the Plan to attract and retain qualified persons to serve as Directors of the Company by enabling such Directors to defer some or all 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. 22 ARTICLE II DEFINITIONS When used herein the following terms shall have the meanings indicated unless a different meaning is clearly required by the context: 2.01 "Board": The Board of Directors of Eaton Corporation. 2.02 "Change in Control of the Company": For purposes of the Plan, 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 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 the Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) of the Exchange Act (as then in effect). 2.03 "Committee": The Governance Committee of the Board which shall have full power and authority to administer and interpret, in its sole discretion, the provisions of the Plan. 2.04 "Company": Eaton Corporation and its corporate successors. 2.05 "Compensation": The total annual fees paid to a Participant for services as a Director of the Company including the annual retainer fee, Board meeting attendance fees, additional annual retainer fees paid to Board Committee chairmen and any other fees paid by the Company for services as a Director of the Company. 2.06 "Deferral Plans": The Company's plan of the same name as this Plan and this Plan. 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. 23 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. 2.09 "Designated Beneficiary": One or more beneficiaries, as designated by a Participant in a written form filed with the Vice President and Secretary of the Company and approved by the Committee, to whom payments otherwise due to or for the benefit of the Participant hereunder shall be made in the event of his death prior to the commencement of benefit payments hereunder or the complete payment of such benefit. In the event no such written designation is made by a Participant or if such Designated Beneficiary shall not be in existence at the time of the Participant's death or if such Designated Beneficiary predeceases the Participant, the Participant shall be deemed to have designated his estate as the Designated Beneficiary. 2.10 "Failure to Pay": The circumstances described in either (i) or (ii) have occurred: (i) Any Participant shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or (ii) More than two Participants shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Participants has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Participants under all the Deferral Plans in any two-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Participants in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amount was paid or was not due and payable. 2.11 "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 6.03. 24 2.12 "Lump Sum Payment": The lump sum amount which is equal to the then present value of the payment, in fifteen annual payments commencing on the date of the lump sum payment, of the Participant's Deferred Account Balance plus a rate of return thereon equal to the rate or rates of interest specified in the Participant's Deferred Compensation Agreement throughout that fifteen year period, discounted with a rate of interest equal to "Moody's Corporate Bond Yield Average - Monthly (Average Corporates)" most recently published by Moody's Investor Services, Inc., or any successor thereto, at the time of the calculation. 2.13 Reserved. 2.14 "Normal Plan Participation Termination Date": The date of the Annual Meeting of the Company's shareholders immediately following the date a Participant attains the age of sixty-eight (68). 2.15 "Participant": A Director who is or hereafter becomes eligible to participate in the Plan and does participate by electing, in the manner specified herein, to defer Compensation pursuant to the Plan. 2.16 "Plan": This Plan for the Deferred Payment of Directors' Fees as contained herein which was originally effective as of October 23, 1985, and which has been amended from time to time thereafter. 2.17 "Regular Annuity Starting Date": The April 1st immediately following a Participant's Normal Plan Participation Termination Date. 2.18 "Termination and Change in Control": The termination of the service as a Director of a Participant for any reason whatsoever prior to a Change in Control, upon a Change in Control or during the three-year period immediately following a Change in Control. 2.19 "Trustee": Shall mean the trustee of any trust which holds assets for the payment of the benefits provided by the Plan. 25 ARTICLE III ELIGIBILITY AND PARTICIPATION 3.01 "Eligibility": Any Director of the Company who is separately compensated for his services on the Board and who is first elected to the Board prior to 1996 shall be eligible to participate under the Plan. Directors who serve as either an officer or an employee of the Company, or who are first elected after 1995, shall not be eligible to participate under the Plan. 3.02 "Manner of Election": (a) Any person wishing to commence participation in the Plan must file a signed copy of the Deferred Compensation Agreement in the form attached as Exhibit A with the Vice President and Secretary of the Company at Eaton Center, Cleveland, Ohio 44114. If the Company accepts the Election, an eligible Director shall become a Participant in the Plan as of December 1, 1985 for an Election filed in 1985 and as of the January 1st immediately following the date an Election is filed in any year after 1985 if such Election is filed prior to December 1 of such year. Upon the request of a Participant, the Committee may in its sole discretion approve the termination of future deferrals by such Participant. (b) The Board shall be vested with the authority to deny Participants the opportunity to defer future Compensation pursuant to the Plan for any reason if such denial is applied equitably to all Participants; provided, however, that the foregoing authority does not apply to any Participant's right to continue to defer the amount constituting his then existing Deferred Account Balance and any past and future earnings thereon, which amounts shall continue to be deferred and/or paid in accordance with the other terms and conditions of this Plan. 3.03 "Limits on Deferred Compensation": (a) Subject to required minimum and maximum annual limitations on the amount of Compensation which may be deferred equal to $5,000 and $30,000, respectively, a Participant may defer all or any portion of his future Compensation which is earned during a period of at least four (4) years (16 full calendar quarters) or for the period to his Normal Plan Participation Termination Date, if earlier, or for any period of time longer than four years which ends prior to his Normal Plan Participation Termination Date. Nothing contained in the Plan shall restrict any Director of the Company from participating in or deferring compensation pursuant to any other Company plan for the deferral of Directors' fees. (b) Notwithstanding the annual limitations imposed under Section 3.03(a), an eligible Participant under the Plan may elect, in the manner specified in Section 3.02, prior to December 1, 1985, to have all or part of his Compensation which was deferred under the 1980 Plan to be held and distributed in accordance with the terms and conditions of the Plan. 26 ARTICLE IV BENEFITS 4.01 "Normal Plan Participation Termination Benefit": (a) The Normal Plan Participation Termination Benefit is a level fifteen (15) year annuity payable to a Participant after his Normal Plan Participation Termination Date in fifteen (15) equal annual installments commencing on the Participant's Regular Annuity Starting Date and continuing on the anniversary of that date each year thereafter until fifteen (15) annual payments have been made; (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 Deferred Compensation Agreement; provided, however, that the Committee may determine, in its sole discretion, to pay the Normal Plan Participation Termination Benefit in a Lump Sum Payment. 4.02 "Early Termination Benefit": The Normal Plan Participation Termination Benefit provided under the Plan is based on the assumption that each Participant will defer a specified amount of Compensation for a specified period of time of not less than (4) years or to his Normal Plan Participation Termination Date, if earlier. In the event a Participant has not deferred Compensation in accordance with the terms and conditions of the Plan for at least four (4) years, resigns as a Director of the Company on a date which is before i) the end of the deferral period he elected or ii) his Normal Plan Participation Termination Date, and iii) any Proposed Change in Control of the Company, then in lieu of the Normal Plan Participation Termination Benefit described in Section 4.01(a) hereof, the Participant shall be entitled to receive an Early Termination Benefit either at age 68 or at the date of his termination as a Director, as determined by the Committee in its sole discretion. The Early Termination Benefit shall be equal to his Deferred Account Balance at the time of his termination as Director and shall be payable in a lump sum or in up to fifteen (15) equal annual installments, as determined by the Committee in its sole discretion. To the Early Termination Benefit payable to a Participant under this Section 4.02 shall be added interest at the rate specified in his Deferred Compensation Agreement, compounded annually, and credited on the unpaid deferred Compensation from the date of termination until the date paid by the Company. 4.03 "Entitlement to Normal Plan Participation Termination Benefit After a Change in Control of the Company": Notwithstanding anything to the contrary herein, if within three years after a Change in Control of the Company any Participant who, before his Normal Plan Participation Termination Date, is removed as a Director of the Company by a vote of the shareholders, resigns as a Director of the Company, completes his term of office as a Director of the Company and is not re-elected for the next successive term or is otherwise unable to defer additional Compensation for a full (4) years or until his Normal Plan Participation Termination Date, whichever is earlier, because of any amendment, suspension or termination of the Plan, shall be entitled to receive the Normal Plan Participation Termination Benefit payable as provided in Section 4.01(a) based upon his then existing Deferred Account Balance. 27 ARTICLE V SURVIVOR BENEFIT 5.01 "Survivor Benefit": Upon the occurrence of any of the following events, the Company shall pay to a Participant's Designated Beneficiary a benefit as defined in this ARTICLE V (herein referred to as a "Survivor Benefit"): (a) The death of a Participant while serving as a Director of the Company; or (b) The death of a Participant after becoming entitled to a Normal Plan Participation Termination Benefit or an Early Termination Benefit but prior to commencement of payment of either such benefit. 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 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 either in a lump sum or in up to fifteen (15) annual installments, as determined by the Committee in its sole discretion. 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 Normal Plan Participation Termination Benefit or Early Termination Benefit, all remaining payments due hereunder shall be made to such Participant's Designated Beneficiary, either in a lump sum or in installments, in such amounts and over such periods, not exceeding the remaining period from the date of the Participant's death, as the Committee may direct in its sole discretion. 28 ARTICLE VI CERTAIN PAYMENTS TO PARTICIPANTS 6.01 "Termination and Change in Control": Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 6.03. 6.02 "Failure to Pay": Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Participant covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Participants in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 6.03. 6.03 "Payment Requirement": No later than the first to occur of (i) six months following the date hereof for any current Participant, (ii) a Termination and Change in Control or a Failure to Pay for any current Participant or (iii) the date upon which any person who is not a current Participant upon the date hereof becomes a Participant, each Participant shall select one of the payment alternatives set forth below with respect to that portion of the Participant's 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 or Failure to Pay, as the case may be; (b) payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 6.03, commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay at the rate or rates of interest specified in the Participant's Deferred Compensation Agreement shall be included with each payment. Payment shall be made to each such Participant in accordance with his selected alternative as provided in Sections 6.01 and 6.02. 29 ARTICLE VII AMENDMENT AND TERMINATION 7.01 "Right to Amend and Terminate the Plan": The Company fully expects to continue the Plan but it reserves the right, at any time or from time to time, by action of the Committee, to modify or amend the Plan, in whole or in part. In addition, the Company reserves the right by action of the Committee 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. Notwithstanding anything herein to the contrary, no amendment, modification or termination of the Plan shall, without the consent of the Participant, alter this provision or impair any of the Participant's rights under the Plan with respect to benefits accrued prior to such amendment, modification or termination. 7.02 "Plan Termination Benefit": (a) In the event of the complete termination of the Plan, each Participant shall be entitled to receive an amount equal to his then Deferred Account Balance (other than amounts initially deferred under the 1980 Plan which will continue to be held in accordance with the terms of the Plan) together with interest thereon at the Prime Rate in effect from time to time during such Deferral Period, compounded annually, and credited from the date of deferral until the date paid by the Company (hereinafter referred to as a "Plan Termination Benefit"). As determined by the Committee in its sole discretion, the Plan Termination Benefit shall be payable either in a lump sum or in up to fifteen (15) annual installments commencing at the time elected by the Participant in his Deferred Compensation Agreement prior to the Deferral Period. (b) In the event of a Participant's death prior to the complete payment of the benefits provided under this Section 8.02, all remaining payments due hereunder shall be made to the Participant's Designated Beneficiary in the same amount as was being received by the Participant. 7.03 "Right to Amend or Terminate the Plan After a Change in Control of the Company": Notwithstanding anything to the contrary herein, no amendment shall be made to the Plan after a Change in Control of the Company which would alter or impair this Section 7.03 or any rights or obligations under the Plan in relation to any Participant without the prior written consent of the Participant; and in the event of complete termination of the Plan after a Change in Control of the Company, each Participant shall be entitled to receive his Normal Plan Participation Termination Benefit, if greater than the Plan Termination Benefit, payable as provided in Section 4.01(a) based upon his then existing Deferred Account Balance. 30 ARTICLE VIII MISCELLANEOUS 8.01 "Non-Alienation of Benefits": Subject to any federal statute to the contrary, no right or benefit under the Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit under the Plan shall be void. No right or benefit hereunder shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits. If a Participant or his Designated Beneficiary (if entitled to benefits under the Plan) 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 Committee, 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 spouse, children, or other dependents, or any of them, in such manner and in such amounts and proportions as the Committee may deem proper. 8.02 "No Trust Created": The obligations of the Company to make payments hereunder shall constitute a liability of the Company to the Participant. Such payments shall be made from the general funds of the Company, and the Company 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, and neither a Participant nor Designated Beneficiary shall have any interest in any particular asset of the Company by reason of its obligations hereunder. Nothing contained in the Plan shall create or be construed as creating a trust of any kind or any other fiduciary relationship between the Company and a Participant or any other person. 8.03 "No Employment Agreement": The Plan shall not be deemed to constitute a contract of employment between the Company and a Participant. Neither shall the execution of the Plan nor any action taken by the Company pursuant to the Plan be held or construed to confer on a Participant any legal right to be continued as Director of the Company, in an executive position or in any other capacity with the Company whatsoever; nor shall any provision herein restrict the right of any Participant to resign as a Director. 8.04 "Binding Effect": Obligations incurred by the Company pursuant to the Plan shall be binding upon and inure to the benefit of the Company, its successors and assigns, and the Participant or his Designated Beneficiary. 8.05 "Claims for Benefits": Each Participant or Designated Beneficiary must claim any benefit to which he may be entitled under this Plan by filing a written notification with the Vice President and Secretary of the Company. The Committee shall make all determinations with respect to such claims for benefits. If a claim is denied by the Committee, it must be denied within a reasonable period of time in a written notice stating the following: (a) The specific reason for the denial. (b) The specific reference to the Plan provision on which the denial is based. (c) A description of additional information necessary for the claimant to present his claim, if any, and an explanation of why such information is necessary. 31 (d) An explanation of the Plan's claims review procedure. The claimant may have a review of the denial by the Committee by filing a written notice with the Vice President and Secretary of the Company within sixty (60) days after the notice of the denial of his 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. 8.06 "Entire Plan": This document and any amendments hereto contain all the terms and provisions of the Plan and shall constitute the entire Plan, any other alleged terms or provisions being of no effect. 32 ARTICLE IX CONSTRUCTION 9.01 "Governing Law": The Plan shall be construed and governed in accordance with the law of the State of Ohio. 9.02 "Gender": 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. 9.03 "Headings, etc.": The cover page of the Plan, the Table of Contents and all headings used in this Plan are for convenience of reference only and are not part of the substance of the Plan. 33 EXHIBIT A DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made this ________ day of ___________________, 20_, between EATON CORPORATION (hereinafter the "Company"), an Ohio corporation, and _______________________, a non-employee Director of the Company (hereinafter called "Participant"). WHEREAS, the Board of Directors of the Company has approved a Plan for the Deferred Payment of Directors' Fees (the "Plan") for the purpose of attracting and retaining qualified persons to serve as Directors of the Company; WHEREAS, the Plan provides that a Director becomes a participant under the Plan upon the execution and delivery by him of a Deferred Compensation Agreement, in the form of this Agreement, to the Administrative Committee under the Plan, and the acceptance of such agreement by the Company; NOW, THEREFORE, in consideration of the mutual agreements herein contained, the Company and the Participant hereby agree as follows: 1. Participation. This Agreement is made to evidence the Participant's participation in the Plan, to set forth the amount of the Participant's Compensation to be deferred thereunder and to establish the interest rates to be used to calculate the Participant's Normal Plan Participation Termination Benefit and his Early Termination Benefit under the Plan. 2. The Plan Controls. The Plan (and all its provisions), as it now exists and as it may be amended hereafter, is incorporated herein and made a part of this Agreement, and the provisions of the Plan, as it may be amended from time to time, shall control the terms and conditions of this Agreement and anything contained herein which is inconsistent with the Plan, as so amended, shall be of no force or effect. 3. Definitions. When used herein, the terms which are defined in the Plan shall have the meanings given them in the Plan. 4. No Interest Created. Neither the Participant nor his Designated Beneficiary shall have any interest in any specific asset of the Company, including policies of insurance. The Participant and his Designated Beneficiary shall have only the right to receive the benefits provided under the Plan. 5. Deferrals. Pursuant to ARTICLE III of the Plan, the Participant hereby elects to defer the receipt of, and the Company hereby elects to defer the payment of, future Compensation in the amount of_________________ dollars ($_______________________ ) for each calendar year during the period of________________________ to ____________________. 6. Normal Plan Participation Termination Benefit Interest Rate. The Participant's Normal Plan Participation Termination Benefit shall be determined by crediting interest to the Participant's total Compensation deferred under the Plan (including amounts transferred 34 from the Company's Plan for the Deferred Payment of Directors' Fees established as of June 1, 1980) at the rate of ____ % compounded annually from the date of deferral until paid by the Company. 7. Early Termination Benefit Interest Rate. In accordance with ARTICLE IV of the Plan, interest shall be credited to the Early Termination Benefit at a rate equal to ____%, compounded annually. 8. Disposition In the Event of Plan Termination. In the event the Company determines to terminate the Plan, the Participant hereby elects to have his Plan Termination Benefit (other than amounts transferred from the 1980 Plan) distributed as indicated by the Participant below: (The Participant should check only one of the boxes below and sign his initials in the opposite blank). _________ I hereby elect to have payment of the Plan Termination Benefit commence within a initials reasonable period of time after the Plan termination date; or _________ I hereby elect to have the Plan Termination Benefit be retained by the Company, credited with initials interest during the Deferral Period, compounded annually, at the Prime Rate and paid commencing upon the earlier to occur of my Normal Plan Participation Termination or my resignation from the Board of Directors of the Company. The Company shall determine in its sole discretion whether the Plan Termination Benefit shall be paid in a lump sum or in up to fifteen (15) annual installments. 9. Entire Agreement. This Agreement contains the entire agreement and understanding by and between the Company and the Participant, and no representations, promises, agreements, or understandings, written or oral, not contained herein shall be of any force or effect. 35 EX-10.B 3 l06915aexv10wb.txt EXHIBIT 10(B) Exhibit 10(b) PLAN FOR DEFERRED PAYMENT OF DIRECTORS' FEES (Originally adopted in 1980 and amended and restated in 1989, 1996 and 2002) 1. Purpose of Plan. It is the purpose of this Plan for Deferred Payment of Directors' Fees (the "Plan") to enable each Director of Eaton Corporation (the "Company") to defer some or all fees which may be payable to the Director for future services to be performed by him as a member of the Board of Directors of the Company, or as a member of any committee thereof. 2. Eligibility. Any Director of the Company who is separately compensated for his services on the Company's Board of Directors, or on any committee of such Board, and who is first elected to the Board prior to 1996, shall be eligible to participate in the Plan. Directors who are first elected to the Board after 1995 shall not be eligible to participate in the Plan. 3. Manner of Election. Any person wishing to participate in the Plan must file with the Vice President and Secretary of the Company at Eaton Center, 1111 Superior Avenue, Cleveland, Ohio 44114-2584, a written notice, on the Notice of Election form attached as Exhibit A, electing to defer payment of all or a portion of his compensation as a Director (an "Election"). An Election shall become effective upon the effective date of the Plan if filed within thirty (30) days following such date. Thereafter, a person for whom an Election is not in effect may elect to participate in the Plan as follows: (a) with respect to Directors' fees payable for any calendar year by filing an Election, in accordance with the procedure described above on or before December 31 of the preceding calendar year; and (b) with respect to Directors' fees payable for any portion of a calendar year which remains at the time of such person's initial election to the Office of Director of the Company, or any subsequent re-election if immediately prior thereto he was not serving as a Director, by filing an Election, in accordance with the procedure described above, within thirty (30) days subsequent to such election or re-election. An effective Election may not be revoked or modified with respect to Directors' fees payable for the calendar year or portion of a calendar year for which such Election is effective and such Election, unless terminated or modified as described below, shall apply to Directors' fees payable with respect to each subsequent calendar year. An effective Election may be terminated or modified for any subsequent calendar year by the filing, as described above, of either a new Election, in regard to modifications, or a Notice of Termination, on the form attached as Exhibit B, in regard to terminations, on or before December 31 immediately preceding the calendar year for which such modification or termination is to be effective. An effective Election shall also terminate on the date a person ceases to be a Director. A person for whom an effective Election is terminated may thereafter file a new Election for future calendar years for which he is eligible to participate in the Plan. Notwithstanding anything herein to the contrary, a Director may elect to have held and distributed in accordance with the terms and conditions of the 1996 Non-Employee Director Fee Deferral Plan all or part of his compensation which was deferred under the Plan. 36 4. Compensation Account. The amount of any Directors' fees deferred in accordance with an Election shall be credited to a deferred compensation account maintained by the Company in the name of the Director ("Deferred Compensation Account"). 5. Adjustment of Deferred Compensation Account. As of each Accounting Date (as defined below), the Deferred Compensation Account for each Director shall be adjusted for the period elapsed since the last preceding Accounting Date as follows: (a) First, the account shall be charged with any distribution made during the period in accordance with Paragraph 7, below. (b) Then, the account shall be credited with the Interest Factor for that period, as defined in Paragraph 6, below. (c) Finally, the account shall be credited with the amount, if any, of any Director's fees deferred during that period in accordance with an effective Election under Paragraph 3, above. For purposes of this Plan, the term "Accounting Date" means each March 31, June 30, September 30 and December 31. 6. Interest Factor. As at any Accounting Date, the term "Interest Factor" means an amount, if any, determined by multiplying (i) an amount equal to the balance of the Director's Deferred Compensation Account as of the close of business on the next preceding Accounting Date by (ii) a percentage determined by multiplying (A) the average of the prime rates of interest in effect at Key Bank (or any successor thereto), Cleveland, Ohio, on the Accounting Date and the next preceding Accounting Date by (B) 1/4. 7. Manner of Payment. A Director's deferred fees will be paid to him or, in the event of his death, to his designated beneficiary, in accordance with his Election. If a Director elects to receive payment of his deferred fees in installments rather than in a lump-sum, the payment period shall not exceed ten years following the Payment Commencement Date, as defined in Paragraph 8 below. The amount of any installment payment shall be determined by multiplying (i) the balance in the Director's Deferred Compensation Account on the date of such installment by (ii) a fraction, the numerator of which is one and the denominator of which is the number of remaining unpaid installments. The balance of the account shall be appropriately reduced in accordance with Paragraph 5, above, to reflect the installment payments made hereunder. Amounts held pending distribution pursuant to this Paragraph 7 shall continue to be credited with the Interest Factor described in Paragraph 6 above. 8. Payment Commencement Date. Payments of accounts deferred pursuant to an election under the Plan shall commence on March 30 of the first year of deferred payment selected by a Director in his Election. If a Director dies prior to the first year of deferred payment selected by him, payments shall commence on March 30 of the calendar year immediately following the year of his death. 9. Beneficiary Designation. A Director may designate, in the Beneficiary Designation form attached as Exhibit C, any person to whom payments are to be made if the Director dies before receiving payment of all amounts due hereunder. A beneficiary designation will be effective only after the signed Beneficiary Designation form is filed with the Secretary of the Company while the Director is alive and will cancel all beneficiary designations signed 37 and filed earlier. If the Director fails to designate a beneficiary as provided above, or if all designated beneficiaries of the Director die before the Director or before complete payment of all amounts due hereunder, remaining unpaid amounts shall be paid in one lump sum to the estate of the last to die of the Director or the Director's designated beneficiaries, if any. 10. Certain Payments to Directors. (a) Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Directors shall be entitled to receive from the Company the payments as provided in Section 10(c). (b) Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Director covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Directors in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 10(c). (c) No later than the first to occur of (i) six months following the date hereof for any current Director, (ii) a Termination and Change in Control or a Failure to Pay for any current Director or (iii) thirty days after the date upon which any person who is not a current Director upon the date hereof becomes a Director, each Director shall select one of the payment alternatives set forth below with respect to that portion of the Director's Deferred Compensation 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: (I) a lump sum payment within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be; (II) payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Director at the time provided in the first paragraph of this Section 10(c), commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment. Payment shall be made to each such Director in accordance with his other selected alternative as provided in Sections 10(a) and 10(b). 11. Non-Alienability of Benefits. Neither the Director nor any beneficiary designated by him shall have any right to, directly or indirectly, alienate, assign or encumber any amount that is or may be payable hereunder. 12. Administration of Plan. Full power and authority to construe, interpret and administer the Plan shall be vested in the Governance Committee of the Company's Board of Directors ("Committee"). Decisions of the Committee shall be final, conclusive and binding upon all parties. Notwithstanding the terms of an Election made by a participant hereunder, the Committee may, in its sole discretion, change the terms of such Election upon the request of 38 a participant or his representative, or a participant's beneficiary or such beneficiary's representative, after considering the needs of the Company and of the participant or the participant's beneficiary. 13. Certain Definitions. "Deferral Plans" - The Company's plan of the same name as this Plan and this Plan. "Failure to Pay" - The circumstances described in either (i) or (ii) have occurred: (i) Any Director shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Director, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Director was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to Director, and the amount which the Director believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or (ii) More than two Directors shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Director, and the amount which the Director believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Directors has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Directors under all the Deferral Plans in any tow-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Directors in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amount was paid or was not due and payable. "Funded Amount" - With respect to the Deferred Compensation Account of any Director, 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 10(c). "Termination and Change in Control" - The termination of the service as a Director of a Director for any reason whatsoever prior to a Change in Control, upon a Change in Control or during the three-year period immediately following a Change in Control. 39 "Trustee" - The trustee of any trust which holds assets for the payment of the benefits provided by the Plan. 14. Governing Law. The provisions of the Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 15. Effective Date and Amendment. This amendment and restatement of the Plan shall become effective on January 23, 2002 . The Committee may amend or terminate the Plan at any time; provided that no such amendment or termination shall adversely affect the amounts in any then-existing Deferred Compensation Account or the payment thereof in accordance with each Director's Election. 40 APPROVAL AND ADOPTION The Plan for Deferred Payment of Directors' Fees, in the form attached hereto, is hereby approved and adopted. /s/ Susan J. Cook - ----------------- 41 EX-10.C 4 l06915aexv10wc.txt EXHIBIT 10(C) Exhibit 10(c) 1996 NON-EMPLOYEE DIRECTOR FEE DEFERRAL PLAN I. PURPOSE The 1996 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. This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933. 42 Change in Control of Eaton - Shall be deemed to occur if (i) a tender offer shall be consummated for 25% or more of the combined voting power of Eaton's then outstanding voting securities, (ii) Eaton shall be merged or consolidated with another corporation and as a result less than 75% of the outstanding voting securities of the resulting corporation shall be owned by the former shareholders of Eaton, other than affiliates (within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act")) of any party to such merger or consolidation, as the same shall have existed immediately prior to such merger or consolidation, (iii) Eaton shall sell substantially all of its assets to another corporation that is not a wholly owned subsidiary of Eaton, (iv) any "person" (as such term is used in Sections 3(a)(9) and 13(d)(3) of the Exchange Act) is or becomes the beneficial owner, directly or indirectly, of 25% or more of the combined voting power of Eaton's then outstanding securities; or (v) during any period of two consecutive years, individuals who at the beginning of that period constitute the Board cease to constitute at least a majority thereof unless the election, or the nomination for election by Eaton's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. For purposes of this Plan, ownership of voting securities shall take into account and include ownership as determined by applying the provisions of Rule 13d-3(d)(l)(i) of the Exchange Act (as then in effect). Committee - The 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. Deferral Plans - This Plan and any other prior plan sponsored by the Company pursuant to which Fees may be deferred. 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. Failure to Pay - The circumstances described in either (i) or (ii) have occurred:(i) Any Participant shall have notified the Company and the Trustee in writing that the Company shall have failed to pay to the Participant, when due, either directly or by direction to the trustee of any trust holding assets for the payment of benefits pursuant to the Plan, at least 75% of any and all amounts which the Participant was entitled to receive at any time in accordance with the terms of the Plan, and that such amounts remain unpaid. Such notice must set forth the amount, if any, which was paid to the Participant by the Company, and the amount which the Participant believes he or she was entitled to receive under the Plan. The failure to make such payment shall have continued for a period of 30 days after receipt of such notice by the Company, and during such 30-day period the Company shall have failed to prove, by clear and convincing evidence as determined by the Trustee in its sole and absolute discretion, that such amount was in fact paid or was not due and payable; or 43 (ii) More than two Participants shall have notified the Company and the Trustee in writing that they have not been paid when due, either directly or by direction to the Trustee, amounts to which they are entitled under the Plan and that such amounts remain unpaid. Each such notice must set forth the amount, if any, which was paid to the Participant, and the amount which the Participant believes he or she was entitled to receive under the Plan. Within 15 days after receipt of each such notice, the Trustee shall determine, on a preliminary basis, whether any failure to pay such Participants has resulted in a failure to pay when due, directly or by direction, at least 75% of the aggregate amount due to all Participants under all the Deferral Plans in any two-year period, and that such amounts remain unpaid. If the Trustee determines that such a failure has occurred, then it shall so notify the Company and the Participants in writing within the same 15 day period. Within a period of 20 days after receipt of such notice from the Trustee, the Company shall have failed to prove by clear and convincing evidence, in the sole and absolute discretion of the Trustee, that such amounts were paid or were not due and payable. 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 10.03. Interest Rate Retirement Deferred Fees - Retirement Deferred Fees that are credited with Treasury Note Based Interest in accordance with Article VII. Participant - A member of the Board who is not an employee of Eaton and who elects to defer receipt of Fees. Periodic Installments - Monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as determined by the Committee in its sole discretion, which are substantially equal in amount, or, in the case of Common Share Retirement 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 1996 Non-Employee Director Fee Deferral Plan pursuant to which Fees may be deferred for later payment. 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, who is age 68 or older, or who is approved by the Committee to qualify as a retirement. Retirement Deferred Fees - That portion of Fees deferred for payment at Retirement, at one year following Retirement, at two years following Retirement or in Periodic Installments commencing after Retirement. 44 Short-Term Deferred Fees - That portion of Fees deferred for payment as determined by the Committee 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. 45 IV. ELECTION TO DEFER Section 4.01 Deferral Options. For each calendar year commencing with 1997, 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, a Participant's election must be completed, signed and filed with the Committee on or before such date as is necessary to defer inclusion of the Fees in the Director's gross income for Federal income tax purposes. Section 4.04 Transfers. Notwithstanding anything herein to the contrary, a Participant may elect to have held and distributed in accordance with the terms and conditions of the Plan all or part of his or her compensation which was deferred under the 1980 Plan for Deferred Payment of Directors' Fees, and any such election with respect to amounts to be held and distributed as Retirement Deferred Fees for any Participant in payment status upon the effective date of such election may be held only as Interest Rate Deferred Fees if to do otherwise would be administratively impractical. 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 determined by the Committee. 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 or to one year after Retirement or to two years after Retirement, but subject to Committee discretion as to date of payment as provided herein. 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. 46 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 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. Upon payment of Common Share Retirement Deferred Fees in cash, including any installment thereof in the case of Periodic Installments, the share units required to make the cash payment shall be converted to an amount equal to the greater of: (a) the product of the average of the mean prices for an Eaton Common Share for the last twenty trading days of the New York Stock Exchange during which Eaton Common Shares were traded in the month immediately preceding the month in which the date of payment occurs, multiplied by the number of share units then credited to the Participant's Account, or (b) if a Change in Control of Eaton shall have occurred at any time within thirty-six months immediately preceding the payment, the product of the number of share units credited to the Participant's Account at the time of payment multiplied by the highest of (i) the highest price paid for an Eaton Common Share in any tender offer in connection with the Change in Control of Eaton; (ii) the price received for an Eaton Common Share in any merger, consolidation or similar event in connection with the Change in Control of Eaton; or (iii) the highest price paid for an Eaton Common Share as reported in any Schedule 13D within the sixty-day period immediately preceding the Change in Control of Eaton. Section 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 distributions may be made either in a lump sum or in installments in such amounts and over such periods, not exceeding the remaining number of annual installments from the date of death of the Participant, as the Committee may direct in its sole discretion. 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 or in Periodic Installments, as the Committee may 47 determine in its sole discretion. The lump sum payment shall be made, or the Periodic Installments shall commence, when the Committee may determine in its sole discretion, no later than February 1 of the calendar year immediately after the calendar year that includes the earliest of: (i) the Participant's death, (ii) the Participant's attainment of age 55 if he or she was credited with at least 10 years of service for Eaton (or an affiliate of Eaton), (iii) the Participant's attainment of age 68, or (iv) the fifth anniversary of the Participant's Termination of Service as a Director. 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. VII. AMENDMENT AND TERMINATION Eaton fully expects to continue the Plan but it reserves the right, except as otherwise provided herein, at any time by action of the Committee , to modify, amend or terminate the Plan for any reason, including adverse changes in the federal tax laws. Notwithstanding the foregoing, 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. 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. After Retirement or other Termination of Service as a Director, the Committee shall determine in its sole discretion (i) whether Retirement Deferred Fees shall be paid in a lump sum or in Periodic Installments, (ii) the date on which a lump sum payment will be made or Periodic Installments will commence, which in the case of Retirement shall be not later than one year following the date to which the deferral was made, and in the case of Termination of Service as a Director for reasons other than Retirement shall be in accordance with Section 6.05, (iii) whether to change the Periodic Installments or the number of years over which they are to be paid, and (iv) whether Common Share Retirement Deferred Fees will be paid in cash or in Eaton Common Shares. In making these determinations, the Committee may consider the wishes and needs of the Participant or his or her Beneficiary. Each Participant or Beneficiary must claim any benefit to which such Beneficiary may be entitled under the Plan by a written notification to the Committee. If a claim is denied, it must be denied within a reasonable period of time in a written notice stating the specific reasons for the denial. The claimant may have a review of the denial by the Committee by filing a written notice with the Committee within sixty days after the notice of the denial of his or her claim. The written decision by the Committee with respect to the review must be given within 120 days after receipt of the written request. The determinations of the Committee shall be final and conclusive. IX. TERMINATION AND CHANGE IN CONTROL - FAILURE TO PAY 48 Section 9.01 Termination and Change in Control. Notwithstanding anything herein to the contrary, upon the occurrence of a Termination and Change in Control, the Participants shall be entitled to receive from the Company the payments as provided in Section 9.03. Section 9.02 Failure to Pay. Notwithstanding anything herein to the contrary, upon the occurrence of a Failure to Pay, each Participant covered by the situation described in clause (i) of the definition of Failure to Pay, or each of the Participants in the event of a situation described in clause (ii) of that definition, as the case may be, shall be entitled to receive from the Company the payments as provided in Section 9.03. Section 9.03 Payment Requirement. No later than (i) the first to occur of six months following the date hereof, a Termination and Change in Control or a Failure to Pay for any person who is a Participant upon such event or (ii) the date upon which any person who is not subject to clause (i) becomes a Participant, each 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 or Failure to Pay, as the case may be; (b) payment in monthly, quarterly, semiannual or annual payments, over a period not to exceed fifteen years, as selected by the Participant at the time provided in the first paragraph of this Section 9.03, commencing within 30 days following the Termination and Change in Control or Failure to Pay, as the case may be, which are substantially equal in amount or in the number of share units being valued and paid or in the number of Eaton Common Shares being distributed, except that earnings attributable to periods following Termination and Change in Control or Failure to Pay shall be included with each payment. Payment of such amounts shall be made to each such Participant in accordance with his or her selected alternative as provided in Section 9.01 and 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. 49 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 Internal Revenue 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 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. 50 EX-12 5 l06915aexv12.txt EXHIBIT 12 . . . Exhibit 12 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Ratio of Earnings to Fixed Charges
Three months ended Year ended December 31 Mar. 31, ------------------------------------- 2004 2003 2002 2001 2000 1999 ---- ---- ---- ---- ---- ---- Income from continuing operations before income taxes $ 173 $ 508 $ 399 $ 278 $ 552 $ 943 Adjustments - ----------- Minority interests in consolidated subsidiaries 3 12 14 8 8 2 Income of equity investees (1) (3) (1) - (1) (1) Interest expensed 22 93 110 149 182 159 Amortization of debt issue costs - 2 2 1 1 - Estimated portion of rent expense representing interest 10 38 34 38 39 36 Amortization of capitalized interest 4 13 13 13 10 8 Distributed income of equity investees 1 - - - 1 - ----- ----- ----- ----- ----- ------- Adjusted income from continuing operations before income taxes $ 212 $ 663 $ 571 $ 487 $ 792 $ 1,147 ===== ===== ===== ===== ===== ======= Fixed charges - ------------- Interest expensed $ 22 $ 93 $ 110 $ 149 $ 182 $ 159 Interest capitalized 2 7 8 12 22 21 Amortization of debt issue costs - 2 2 1 1 - Estimated portion of rent expense representing interest 10 38 34 38 39 36 ----- ----- ----- ----- ----- ------- Total fixed charges $ 34 $ 140 $ 154 $ 200 $ 244 $ 216 ===== ===== ===== ===== ===== ======= Ratio of earnings to fixed charges 6.24 4.73 3.71 2.44 3.25 5.31
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. 51 EX-31.1 6 l06915aexv31w1.txt EXHIBIT 31.1 Exhibit 31.1 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Certification I, Alexander M. Cutler, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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)) 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) 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 c) 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 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: May 7, 2004 /s/ Alexander M. Cutler _________________________________________ Alexander M. Cutler Chairman and Chief Executive Officer 52 EX-31.2 7 l06915aexv31w2.txt EXHIBIT 31.2 Exhibit 31.2 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Certification I, Richard H. Fearon, certify that: 1. I have reviewed this quarterly report on Form 10-Q 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)) 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) 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 c) 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 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: May 7, 2004 /s/ Richard H. Fearon ________________________________________ Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 53 EX-32.1 8 l06915aexv32w1.txt EXHIBIT 32.1 Exhibit 32.1 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Certification This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 ("10-Q Report"). I hereby certify that, based on my knowledge, the 10-Q 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-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: May 7, 2004 /s/ Alexander M. Cutler _________________________________________ Alexander M. Cutler Chairman and Chief Executive Officer 54 EX-32.2 9 l06915aexv32w2.txt EXHIBIT 32.2 Exhibit 32.2 Eaton Corporation Quarterly Report on Form 10-Q First Quarter 2004 Certification This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 ("10-Q Report"). I hereby certify that, based on my knowledge, the 10-Q 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-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation and its consolidated subsidiaries. Date: May 7, 2004 /s/ Richard H. Fearon _________________________________________ Richard H. Fearon Executive Vice President - Chief Financial and Planning Officer 55 -----END PRIVACY-ENHANCED MESSAGE-----