ETN 09.30.2011 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2011
Commission file number 1-1396
EATON CORPORATION
(Exact name of registrant as specified in its charter)
Ohio
 
34-0196300
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
 
 
Eaton Center, Cleveland, Ohio
 
44114-2584
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(216) 523-5000
 
 
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not applicable
 
 
 
 
 
 
(Former name, former address and former fiscal year if changed since last report)
 
 
 
 
 
 
 
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 334.2 million Common Shares outstanding as of September 30, 2011.
 

Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

EATON CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

 
Three months ended
September 30
 
Nine months ended
September 30
(In millions except for per share data)
2011
 
2010
 
2011
 
2010
Net sales
$
4,123

 
$
3,571

 
$
12,016

 
$
10,052

 
 
 
 
 
 
 
 
Cost of products sold
2,900

 
2,480

 
8,444

 
7,068

Selling and administrative expense
668

 
651

 
2,031

 
1,842

Research and development expense
104

 
104

 
316

 
308

Interest expense-net
29

 
33

 
92

 
102

Other income-net
(10
)
 
(2
)
 
(30
)
 
(11
)
Income before income taxes
432

 
305

 
1,163

 
743

Income tax expense
65

 
36

 
172

 
89

Net income
367

 
269

 
991

 
654

Less net income for noncontrolling interests
(2
)
 
(1
)
 
(3
)
 
(5
)
Net income attributable to Eaton common shareholders
$
365

 
$
268

 
$
988

 
$
649

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Diluted
$
1.07

 
$
0.78

 
$
2.86

 
$
1.90

Basic
1.07

 
0.80

 
2.90

 
1.93

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding
 
 
 
 
 
 
 
Diluted
341.9

 
340.6

 
344.4

 
340.1

Basic
338.1

 
335.2

 
339.7

 
334.7

 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.34

 
$
0.29

 
$
1.02

 
$
0.79


Net income per common share, weighted-average number of common shares outstanding and cash dividends paid per common share have been restated to give effect to the two-for-one stock split. See Note 1 for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

EATON CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
September 30,
2011
 
December 31,
2010
Assets
 
 
 
Current assets
 
 
 
Cash
$
278

 
$
333

Short-term investments
536

 
838

Accounts receivable-net
2,549

 
2,239

Inventory
1,769

 
1,564

Other current assets
601

 
532

Total current assets
5,733

 
5,506

 
 
 
 
Property, plant and equipment-net
2,537

 
2,477

 
 
 
 
Other noncurrent assets

 

Goodwill
5,571

 
5,454

Other intangible assets
2,253

 
2,272

Deferred income taxes
971

 
1,001

Other assets
562

 
542

Total assets
$
17,627

 
$
17,252

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
86

 
$
72

Current portion of long-term debt
321

 
4

Accounts payable
1,527

 
1,408

Accrued compensation
401

 
465

Other current liabilities
1,445

 
1,284

Total current liabilities
3,780

 
3,233

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
3,368

 
3,382

Pension liabilities
1,182

 
1,429

Other postretirement benefits liabilities
634

 
743

Deferred income taxes
456

 
487

Other noncurrent liabilities
461

 
575

Total noncurrent liabilities
6,101

 
6,616

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
7,723

 
7,362

Noncontrolling interests
23

 
41

Total equity
7,746

 
7,403

Total liabilities and equity
$
17,627

 
$
17,252


The accompanying notes are an integral part of these condensed consolidated financial statements.

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Table of Contents

EATON CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Nine months ended
September 30
(In millions)
2011
 
2010
Operating activities
 
 
 
Net income
$
991

 
$
654

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
419

 
413

Contributions to pension plans
(341
)
 
(378
)
Contributions to other postretirement benefits plans
(150
)
 
(61
)
Changes in working capital
(290
)
 
(70
)
Other-net
60

 
169

Net cash provided by operating activities
689

 
727

 
 
 
 
Investing activities
 
 
 
Cash paid for acquisitions of businesses
(298
)
 
(172
)
Capital expenditures for property, plant and equipment
(384
)
 
(207
)
Sales (purchases) of short-term investments-net
272

 
(47
)
Other-net
1

 
(6
)
Net cash used in investing activities
(409
)
 
(432
)
 
 
 
 
Financing activities
 
 
 
Borrowings with original maturities of more than three months
 
 
 
Proceeds
352

 
55

Payments
(14
)
 
(59
)
Payments with original maturities of less than three months-net
   (primarily commercial paper)
(38
)
 
(19
)
Cash dividends paid
(348
)
 
(265
)
Exercise of employee stock options
66

 
60

Repurchase of shares
(343
)
 

Other-net
(4
)
 
2

Net cash used in financing activities
(329
)
 
(226
)
 
 
 
 
Effect of foreign exchange rate changes on cash
(6
)
 
(14
)
Total (decrease) increase in cash
(55
)
 
55

Cash at the beginning of the period
333

 
340

Cash at the end of the period
$
278

 
$
395


The accompanying notes are an integral part of these condensed consolidated financial statements.

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EATON CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation (Eaton or Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2010 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the SEC.
On January 27, 2011, Eaton’s Board of Directors announced a two-for-one stock 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 7, 2011, and the additional shares were distributed on February 28, 2011. Accordingly, all per share amounts, weighted-average shares outstanding, and equity-based compensation presented in the condensed consolidated financial statements and notes have been adjusted retroactively to reflect the stock split.
Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 2.
ACQUISITIONS OF BUSINESSES
In 2011 and 2010, Eaton acquired businesses and entered into a joint venture in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. These transactions are summarized below:
Acquired businesses and joint venture
 
Date of
transaction
 
Business
segment
 
Annual sales
IE Power, Inc.
 
August 31,
2011
 
Electrical
Americas
 
$5 for 2010
A Canada-based provider of high power inverters for a variety of mission-critical applications including solar, wind and battery energy storage.
 
 
 
 
 
 
 
 
 
 
 
 
 
E. Begerow GmbH & Co. KG
 
August 15,
2011
 
Hydraulics
 
$84 for 2010
A Germany-based system provider of advanced liquid filtration solutions. This business develops and produces technologically innovative filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications.
 
 
 
 
 
 
 
 
 
 
 
 
 
ACTOM Low Voltage
 
June 30,
2011
 
Electrical
Rest of World
 
$65 for the
year ended
May 31,
2011
A South Africa manufacturer and supplier of motor control components, engineered electrical distribution systems and uninterruptible power supply (UPS) systems.
 
 
 
 
 
 
 
 
 
 
 
 
 
C.I. ESI de Colombia S.A.
 
June 2,
2011
 
Electrical
Americas
 
$8 for 2010
A Colombia-based distributor of industrial electrical equipment and engineering services in the Colombian market, focused on oil and gas, mining, and industrial and commercial construction.
 
 
 
 
 
 
 
 
 
 
 
 
 
Internormen Technology Group
 
May 12,
2011
 
Hydraulics
 
$55 for 2010
A Germany-based manufacturer of hydraulic filtration and instrumentation with sales and distribution subsidiaries in China, the United States, India and Brazil.
 
 
 
 
 
 
 
 
 
 
 
 
 
Eaton-SAMC (Shanghai) Aircraft Conveyance System Manufacturing Co., Ltd.
 
March 8,
2011
 
Aerospace
 
New joint venture
A 49%-owned joint venture in China focusing on the design, development, manufacturing and support of fuel and hydraulic conveyance systems for the global civil aviation market.
 
 
 
 
 
 

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Table of Contents

Acquired businesses and joint venture
 
Date of
transaction
 
Business
segment
 
Annual sales
Tuthill Coupling Group
 
January 1,
2011
 
Hydraulics
 
$35 for the
year ended
November 30,
2010
A United States and France-based manufacturer of pneumatic and hydraulic quick coupling solutions and leak-free connectors used in industrial, construction, mining, defense, energy and power applications.
 
 
 
 
 
 
 
 
 
 
 
 
 
Chloride Phoenixtec Electronics
 
October 12,
2010
 
Electrical
Rest of World
 
$25 for the
year ended
September 30,
2010
A China manufacturer of UPS systems. Eaton acquired the remaining shares to increase its ownership from 50% to 100%.
 
 
 
 
 
 
 
 
 
 
 
 
 
CopperLogic, Inc.
 
October 1,
2010
 
Electrical
Americas
 
$35 for the
year ended
September 30,
2010
A United States-based manufacturer of electrical and electromechanical systems.
 
 
 
 
 
 
 
 
 
 
 
 
 
Wright Line Holding, Inc.
 
August 25,
2010
 
Electrical
Americas
 
$101 for the
year ended
June 30,
2010
A United States provider of customized enclosures, rack systems, and air-flow management systems to store, power, and secure mission-critical IT data center electronics.
 
 
 
 
 
 
 
 
 
 
 
 
 
EMC Engineers, Inc.
 
July 15,
2010
 
Electrical
Americas
 
$24 for 2009
A United States energy engineering and energy services company that delivers energy efficiency solutions for a wide range of governmental, educational, commercial and industrial facilities.
 
 
 
 
 
 

Note 3.
ACQUISITION INTEGRATION AND RESTRUCTURING CHARGES
Acquisition Integration Charges
Eaton incurs charges related to the integration of acquired businesses. A summary of these charges follows:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2011
 
2010
 
2011
 
2010
Business segment
 
 
 
 
 
 
 
Electrical Americas
$
3

 
$

 
$
7

 
$
2

Electrical Rest of World

 
6

 
1

 
20

Hydraulics
1

 

 
1

 

Aerospace

 
1

 

 
3

Total integration charges before income taxes
$
4

 
$
7

 
$
9

 
$
25

After-tax integration charges
$
2

 
$
4

 
$
6

 
$
16

Per common share
$
0.01

 
$
0.01

 
$
0.02

 
$
0.05

Charges in 2011 were related primarily to CopperLogic, Wright Line Holding and EMC Engineers. Charges in 2010 were related primarily to Moeller and Phoenixtec. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Note 13. Business Segment Information, the charges reduced Operating profit of the related business segment.

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Table of Contents

Workforce Reduction and Plant Closing Liabilities
The following table summarizes the liabilities related to acquisition integration, plant closing charges, and other workforce reduction actions:
 
Workforce reductions
 
Plant closing and other
 
 
 
Employees
 
Dollars
 
 
Total
Balance at January 1, 2011
327

 
$
11

 
$
5

 
$
16

Liabilities recognized
79

 
2

 
7

 
9

Utilized
(258
)
 
(7
)
 
(10
)
 
(17
)
Balance at September 30, 2011
148

 
$
6

 
$
2

 
$
8


Note 4.
GOODWILL
A summary of goodwill follows:
 
September 30,
2011
 
December 31,
2010
Electrical Americas
$
2,059

 
$
2,061

Electrical Rest of World
1,001

 
985

Hydraulics
1,111

 
1,007

Aerospace
1,041

 
1,037

Truck
150

 
151

Automotive
209

 
213

Total goodwill
$
5,571

 
$
5,454

The increase in goodwill in 2011 was primarily due to businesses acquired during 2011, partially offset by the impact of foreign currency translation. For additional information regarding acquired businesses, see Note 2.
Assessing Goodwill for Impairment
In September 2011, the Financial Accounting Standards Board issued a revised standard on testing goodwill for impairment. The revised standard allows an entity to first assess the carrying value of goodwill based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the reporting unit's carrying amount. If, based on a qualitative assessment, the fair value of a reporting unit is more likely than not lower than its carrying value, the entity must then test goodwill from a quantitative perspective similar to prior guidance. This standard is effective for 2012, with early adoption permitted. Eaton elected to adopt this standard for its 2011 annual impairment testing.
Goodwill is tested for impairment annually as of July 1 at the reporting unit level, which is equivalent to Eaton's operating segments. As disclosed in Eaton's 2010 Form 10-K, impairment testing for 2010 was performed from a quantitative perspective using a discounted cash flow model to estimate the fair value of each operating segment. For 2010, the fair value of Eaton's reporting units substantially exceeded the respective carrying values.
Impairment testing for 2011 was performed by assessing certain qualitative trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors were compared to and based on the assumptions used in the quantitative assessment performed in 2010. For 2011, it is more likely than not that the fair value of Eaton's reporting units continues to substantially exceed the respective carrying amount.

Note 5.
DEBT
On June 16, 2011, Eaton issued $300 floating rate senior unsecured Notes due June 16, 2014 (the Notes). The Notes bear interest annually at a floating rate, reset quarterly, equal to the three-month LIBOR rate for U.S. dollars plus .33% (33 basis points). Interest is payable quarterly in arrears. The Notes contain a provision which requires the Company to make an offer to purchase all or any part of the Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest if certain change of control events occur. The Notes are subject to customary non-financial covenants.

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Table of Contents

Eaton refinanced a $500, five-year revolving credit facility in June 2011 (the Facility). This refinancing maintains long-term revolving credit facilities at a total of $1.5 billion. The revolving credit facility is used to support commercial paper borrowings. The Facility will expire June 16, 2016, replacing a $500 facility that had been set to expire on September 1, 2011.

Note 6.
RETIREMENT BENEFITS PLANS
The components of retirement benefits expense follow:
 
Three months ended September 30
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
23

 
$
20

 
$
12

 
$
10

 
$
4

 
$
4

Interest cost
33

 
33

 
19

 
17

 
10

 
11

Expected return on plan assets
(41
)
 
(39
)
 
(17
)
 
(15
)
 

 

Amortization
19

 
13

 
3

 
2

 
3

 
3

 
34

 
27

 
17

 
14

 
17

 
18

Curtailment loss

 

 
1

 

 

 

Settlement loss
5

 
4

 

 

 

 

Total expense
$
39

 
$
31

 
$
18

 
$
14

 
$
17

 
$
18

 
Nine months ended September 30
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
Service cost
$
69

 
$
60

 
$
37

 
$
29

 
$
12

 
$
12

Interest cost
99

 
99

 
59

 
51

 
30

 
34

Expected return on plan assets
(123
)
 
(117
)
 
(53
)
 
(46
)
 

 

Amortization
57

 
39

 
9

 
6

 
9

 
8

 
102

 
81

 
52

 
40

 
51

 
54

Curtailment loss

 

 
1

 

 

 

Settlement loss
12

 
13

 
3

 

 

 

Total expense
$
114

 
$
94

 
$
56

 
$
40

 
$
51

 
$
54

During the second quarter of 2011, Eaton contributed $100 into a Voluntary Employee Benefit Association trust for the pre-funding of postretirement Medicare Part D prescription drug benefits for the Company's eligible United States employees and retirees. The contribution was made as part of the Company's strategy to improve the funding of its pension and postretirement obligations. As part of that strategy, in the first quarter of 2011, the Company contributed $250 to its United States qualified pension plans.

Note 7.
LEGAL CONTINGENCIES
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At September 30, 2011, the Company has a total accrual of 67 Brazilian Reais related to this matter, comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($32 based on current exchange rates) with an additional 7 Brazilian Reais recognized in 2011 ($4 based on current exchange rates) due to subsequent accruals for interest and inflation. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability. In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton Holding and Eaton Ltda. filed appeals on various issues to the Superior Court of Justice in Brasilia. On September 27, 2011, the Superior Court of Justice accepted two of the appeals and will hear those appeals in due course. Another appeal remains pending in the lower appellate court.

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Table of Contents

On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court for Delaware. The action sought damages, which would be trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion was denied on March 10, 2011. On March 14, 2011, Eaton filed a motion for entry of final judgment of liability, zero damages and no injunctive relief. That motion was denied on June 9, 2011. On August 19, 2011, the Court entered final judgment of liability but awarded zero damages to plaintiffs. The Court also entered an injunction prohibiting Eaton from offering rebates or other incentives based on purchasing targets but stayed the injunction pending appeal. Eaton has appealed the liability finding and the injunction to the Third Circuit Court of Appeals. Meritor has cross-appealed the finding of zero damages.
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries (including asbestos claims), antitrust matters and employment-related matters. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.

Note 8.
INCOME TAXES
The effective income tax rate for the third quarter of 2011 was 15.2% compared to 11.7% for the third quarter of 2010 and 14.8% for the first nine months of 2011 compared to 12.0% for the first nine months of 2010. Higher effective tax rates in both the third quarter and first nine months of 2011 were primarily attributable to greater levels of income in high tax jurisdictions, particularly in the United States and Brazil, due to improved economic and market conditions. The effective income tax rate for the third quarter of 2011 was also favorably impacted by positive adjustments to the tax provision for 2010 tax returns filed during the third quarter in the United States and international tax jurisdictions.

Note 9.
EQUITY
Eaton has a common share repurchase program (2007 Program) that authorizes the repurchase of 10 million common shares. During the first nine months of 2011, 8.3 million common shares were repurchased under the 2007 Program in the open market at a total cost of $343. On September 28, 2011, Eaton's Board of Directors approved a common share repurchase program (2011 Program) which replaced the 2007 Program and authorizes the purchase of up to 20 million shares, not to exceed an aggregate purchase price of $1.25 billion. The common shares are expected to be repurchased over time, depending on market conditions, the market price of common shares, capital levels and other considerations. No common shares were repurchased in the open market in the first nine months of 2010.
The changes in Shareholders’ equity follow:
 
Eaton
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2010
$
7,362

 
$
41

 
$
7,403

 
 
 
 
 
 
Net income
988

 
3

 
991

Other comprehensive loss
(67
)
 

 
(67
)
Total comprehensive income
921

 
3

 
924

Cash dividends paid
(348
)
 
(7
)
 
(355
)
Issuance of shares under equity-based compensation plans-net
131

 

 
131

Business divestiture

 
(14
)
 
(14
)
Repurchase of shares
(343
)
 

 
(343
)
Balance at September 30, 2011
$
7,723

 
$
23

 
$
7,746


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Table of Contents

Comprehensive (Loss) Income
Comprehensive (loss) income consists primarily of net income, foreign currency translation and related hedging instruments, changes in unrecognized costs of pension and other postretirement benefits, and changes in the effective portion of open derivative contracts designated as cash flow hedges. The following table summarizes the components of Comprehensive (loss) income:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2011
 
2010
 
2011
 
2010
Net income
$
367

 
$
269

 
$
991

 
$
654

 
 
 
 
 
 
 
 
Foreign currency translation and related hedging instruments
(449
)
 
419

 
(111
)
 
(64
)
Pensions and other postretirement benefits
34

 
4

 
69

 
51

Cash flow hedges
(20
)
 
7

 
(25
)
 
(2
)
Other comprehensive (loss) income
(435
)
 
430

 
(67
)
 
(15
)
Total comprehensive (loss) income
(68
)
 
699

 
924

 
639

Adjustment for comprehensive income attributable to noncontrolling interests
(2
)
 
(1
)
 
(3
)
 
(5
)
Total Comprehensive (loss) income attributable to Eaton common shareholders
$
(70
)
 
$
698

 
$
921

 
$
634

Net Income per Common Share
A summary of the calculation of net income per common share attributable to common shareholders follows:
 
Three months ended
September 30
 
Nine months ended
September 30
(Shares in millions)
2011
 
2010
 
2011
 
2010
Net income attributable to Eaton common shareholders
$
365

 
$
268

 
$
988

 
$
649

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding-diluted
341.9

 
340.6

 
344.4

 
340.1

Less dilutive effect of stock options and restricted stock awards
3.8

 
5.4

 
4.7

 
5.4

Weighted-average number of common shares outstanding-basic
338.1

 
335.2

 
339.7

 
334.7

 
 
 
 
 
 
 
 
Net income per common share
 
 
 
 
 
 
 
Diluted
$
1.07

 
$
0.78

 
$
2.86

 
$
1.90

Basic
1.07

 
0.80

 
2.90

 
1.93

For the third quarter and first nine months of 2011, 2.7 million and 1.1 million stock options, respectively, were excluded from the calculation of diluted net income per common share because the exercise price of the options exceeded the average market price of the common shares during the period and their effect, accordingly, would have been antidilutive. For the third quarter and first nine months of 2010, 7.0 million and 8.8 million stock options, respectively, were excluded from the calculation of diluted net income per common share because the exercise price of the options exceeded the average market price of the common shares during the period and their effect, accordingly, would have been antidilutive.

Note 10.
FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that is determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

10

Table of Contents

A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
 
Total
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Other
observable
inputs
(Level 2)
 
Unobservable
inputs
(Level 3)
September 30, 2011
 
 
 
 
 
 
 
Cash
$
278

 
$
278

 
$

 
$

Short-term investments
536

 
536

 

 

Net derivative contracts
25

 

 
25

 

Long-term debt converted to floating interest rates by
   interest rate swaps
67

 

 
67

 

 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
Cash
$
333

 
$
333

 
$

 
$

Short-term investments
838

 
838

 

 

Net derivative contracts
69

 

 
69

 

Long-term debt converted to floating interest rates by
   interest rate swaps
42

 

 
42

 

Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were recognized using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $3,689 and fair value of $4,324 at September 30, 2011 compared to $3,386 and $3,787, respectively, at December 31, 2010.

Note 11.
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, foreign currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, foreign currency forward exchange contracts, foreign currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking all derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss on the hedged item is included in income.

11

Table of Contents

Hedges of the foreign currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. During the third quarter and first nine months of 2011, Eaton incurred losses associated with commodity hedge contracts of $23 and $19, respectively. These losses were incurred due to significant declines in metal prices during primarily the last two weeks in September. Gains and losses associated with commodity hedge contracts are reported in Cost of products sold.
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:
 
Notional
amount
 
Other
 current
assets
 
Other
long-term
assets
 
Other
current
liabilities
 
Type of
hedge
 
Term
September 30, 2011
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
540

 
$

 
$
67

 
$

 
Fair value
 
2 to 23 years
Foreign currency exchange contracts
331

 
5

 

 
12

 
Cash flow
 
12 to 36 months
Commodity contracts
50

 

 

 
12

 
Cash flow
 
12 months
Total
 
 
$
5

 
$
67

 
$
24

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
2,845

 
$
24

 
 
 
$
25

 
 
 
12 months
Commodity contracts
114

 

 
 
 
22

 
 
 
12 months
Total
 
 
$
24

 
 
 
$
47

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
540

 
$

 
$
42

 
$

 
Fair value
 
2 to 23 years
Foreign currency exchange contracts
227

 
4

 

 
5

 
Cash flow
 
12 to 36 months
Commodity contracts
39

 
8

 

 

 
Cash flow
 
12 months
Cross currency swaps
75

 
2

 

 

 
Net investment
 
12 months
Total
 
 
$
14

 
$
42

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
2,777

 
$
20

 
 
 
$
19

 
 
 
12 months
Commodity contracts
102

 
17

 
 
 

 
 
 
12 months
Total
 
 
$
37

 
 
 
$
19

 
 
 
 
The foreign currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage foreign currency volatility or exposure on intercompany sales and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these foreign currency exchange contracts.


12

Table of Contents

Amounts recognized in Accumulated other comprehensive income (loss) follow:
 
Three months ended September 30
 
2011
 
2010
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
(7
)
 
$
(1
)
 
$
3

 
$
1

Commodity contracts
(12
)
 
2

 
5

 

Derivatives designated as net investment hedges
 
 
 
 
 
 
 
Cross currency swaps

 

 
(16
)
 

Total
$
(19
)
 
$
1

 
$
(8
)
 
$
1

 
Nine months ended September 30
 
2011
 
2010
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
Foreign currency exchange contracts
$
(6
)
 
$
(1
)
 
$
2

 
$
1

Commodity contracts
(13
)
 
7

 
2

 
5

Derivatives designated as net investment hedges
 
 
 
 
 
 
 
Cross currency swaps
1

 

 
(12
)
 

Total
$
(18
)
 
$
6

 
$
(8
)
 
$
6

Gains and losses reclassified from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income were recognized in Cost of products sold.
Amounts recognized in net income follow:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2011
 
2010
 
2011
 
2010
Derivatives designated as fair value hedges
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
23

 
$
13

 
$
25

 
$
49

Related long-term debt converted to floating interest
   rates by interest rate swaps
(23
)
 
(13
)
 
(25
)
 
(49
)
 
$

 
$

 
$

 
$

Gains and losses described above were recognized in Interest expense.

13

Table of Contents

Note 12.
INVENTORY
The components of inventory follow:
 
September 30,
2011
 
December 31,
2010
Raw materials
$
747

 
$
651

Work-in-process
243

 
229

Finished goods
907

 
800

Inventory at FIFO
1,897

 
1,680

Excess of FIFO over LIFO cost
(128
)
 
(116
)
Total inventory
$
1,769

 
$
1,564


Note 13.
BUSINESS SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton’s operating segments are Electrical Americas, Electrical Rest of World, Hydraulics, Aerospace, Truck and Automotive. For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2010 Form 10-K.

14

Table of Contents

EATON CORPORATION
BUSINESS SEGMENT INFORMATION

 
Three months ended
September 30
 
Nine months ended
September 30
 
2011
 
2010
 
2011
 
2010
Net sales
 
 
 
 
 
 
 
Electrical Americas
$
1,074

 
$
967

 
$
3,071

 
$
2,663

Electrical Rest of World
755

 
707

 
2,285

 
1,980

Hydraulics
717

 
583

 
2,130

 
1,641

Aerospace
420

 
390

 
1,218

 
1,136

Truck
715

 
534

 
1,964

 
1,479

Automotive
442

 
390

 
1,348

 
1,153

Total net sales
$
4,123

 
$
3,571

 
$
12,016

 
$
10,052

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Electrical Americas
$
156

 
$
141

 
$
432

 
$
366

Electrical Rest of World
62

 
81

 
209

 
183

Hydraulics
109

 
76

 
335

 
207

Aerospace
71

 
60

 
166

 
157

Truck
139

 
74

 
349

 
179

Automotive
62

 
39

 
167

 
120

Total segment operating profit
599

 
471

 
1,658

 
1,212

 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
Amortization of intangible assets
(47
)
 
(46
)
 
(143
)
 
(134
)
Interest expense-net
(29
)
 
(33
)
 
(92
)
 
(102
)
Pension and other postretirement benefits expense
(35
)
 
(30
)
 
(105
)
 
(91
)
Other corporate expense-net
(56
)
 
(57
)
 
(155
)
 
(142
)
Income before income taxes
432

 
305

 
1,163

 
743

Income tax expense
65

 
36

 
172

 
89

Net income
367

 
269

 
991

 
654

Less net income for noncontrolling interests
(2
)
 
(1
)
 
(3
)
 
(5
)
Net income attributable to Eaton common shareholders
$
365

 
$
268

 
$
988

 
$
649



15

Table of Contents

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).

TWO-FOR-ONE STOCK SPLIT
On January 27, 2011, Eaton’s Board of Directors 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 7, 2011, and the additional shares were distributed on February 28, 2011. Accordingly, all share and per share data have been adjusted retroactively to reflect the stock split.

COMPANY OVERVIEW
Eaton Corporation is a diversified power management company with 2010 sales of $13.7 billion. The Company is a global technology leader in electrical components and systems for power quality, distribution and control; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 73,000 employees in over 50 countries, and sells products to customers in more than 150 countries.
Eaton acquired certain businesses that affect comparability on a year over year basis. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. For a list of business acquisitions and joint ventures impacting the comparative periods, see Note 2 to the Condensed Consolidated Financial Statements.
A summary of Eaton’s Net sales, Net income attributable to Eaton common shareholders, and Net income per common share-diluted follows:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2011
 
2010
 
2011
 
2010
Net sales
$
4,123

 
$
3,571

 
$
12,016

 
$
10,052

Net income attributable to Eaton common shareholders
365

 
268

 
988

 
649

Net income per common share-diluted
$
1.07

 
$
0.78

 
$
2.86

 
$
1.90


RESULTS OF OPERATIONS
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per common share, and operating profit before acquisition integration charges for each business segment, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in the table below and in the discussion of the operating results of each business segment. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.

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Table of Contents

Consolidated Financial Results
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
4,123

 
$
3,571

 
15
%
 
$
12,016

 
$
10,052

 
20
%
Gross profit
1,223

 
1,091

 
12
%
 
3,572

 
2,984

 
20
%
Percent of net sales
29.7
%
 
30.6
%
 
 
 
29.7
%
 
29.7
%
 
 
Income before income taxes
432

 
305

 
42
%
 
1,163

 
743

 
57
%
Net income
$
367

 
$
269

 
36
%
 
$
991

 
$
654

 
52
%
Less net income for noncontrolling interests
(2
)
 
(1
)
 
 
 
(3
)
 
(5
)
 
 
Net income attributable to Eaton common shareholders
365

 
268

 
36
%
 
988

 
649

 
52
%
Excluding acquisition integration charges (after-tax)
2

 
4

 
 
 
6

 
16

 
 
Operating earnings
$
367

 
$
272

 
35
%
 
$
994

 
$
665

 
49
%
 
 
 
 
 
 
 
 
 
 
 
 
Net income per common share-diluted
$
1.07

 
$
0.78

 
37
%
 
$
2.86

 
$
1.90

 
51
%
Excluding per share impact of acquisition integration
   charges (after-tax)
0.01

 
0.01

 
 
 
0.02

 
0.05

 
 
Operating earnings per common share
$
1.08

 
$
0.79

 
37
%
 
$
2.88

 
$
1.95

 
48
%
Net Sales
Net sales in the third quarter of 2011 increased by 15% compared to the third quarter of 2010. The sales increase was due to an increase of 11% in core sales, 2% from acquisitions of businesses, and 2% from the favorable impact of foreign exchange. Net sales in the first nine months of 2011 increased by 20% compared to the first nine months of 2010. The sales increase was due to and increase of 14% in core sales, 4% from the favorable impact of foreign exchange, and 2% from acquisitions of businesses. The increase in core sales in both the third quarter and first nine months of 2011 reflects the continuing global expansion of the Company's markets, which increased 11% in the third quarter of 2011 compared to the same period in 2010, and the global economic recovery from the depressed levels of 2009. Eaton continues to anticipate that its end markets will grow by 11% for all of 2011.
Gross Profit
Gross profit increased by 12% in the third quarter of 2011 compared to the third quarter of 2010. Gross profit margin decreased 0.9 percentage points from 30.6% in the third quarter of 2010 to 29.7% in the third quarter of 2011. Gross profit increased by 20% in the first nine months of 2011 compared to the first nine months of 2010. Gross profit margin was 29.7% for the first nine months of both 2011 and 2010. The gross profit margin in both the third quarter and first nine months of 2011 was positively impacted by higher sales volumes and the benefits of substantial changes in the Company’s cost structure implemented in the past two years. These benefits were partially offset by higher raw material and commodity costs, including losses incurred of $23 associated with commodity hedge contracts due to significant declines in metal prices primarily during the last two weeks in September. For additional information related to derivatives, see Note 11 to the Condensed Consolidated Financial Statements.
Income Taxes
The effective income tax rate for the third quarter of 2011 was 15.2% compared to 11.7% for the third quarter of 2010 and 14.8% for the first nine months of 2011 compared to 12.0% for the first nine months of 2010. Higher effective tax rates in both the third quarter and first nine months of 2011 were primarily attributable to greater levels of income in high tax jurisdictions, particularly in the United States and Brazil, due to improved economic and market conditions. The effective income tax rate for the third quarter of 2011 was also favorably impacted by positive adjustments to the tax provision for 2010 tax returns filed during the third quarter in the United States and international tax jurisdictions.

17

Table of Contents

Net Income
Net income attributable to Eaton common shareholders of $365 in the third quarter of 2011 increased 36% compared to net income of $268 in the third quarter of 2010, and Net income per common share of $1.07 in the third quarter of 2011 increased 37% over Net income per common share of $0.78 in the third quarter of 2010. Net income attributable to Eaton common shareholders of $988 in the first nine months of 2011 increased 52% compared to net income of $649 in the first nine months of 2010, and Net income per common share of $2.86 in the first nine months of 2011 increased 51% over Net income per common share of $1.90 in the first nine months of 2010. The increase in both the third quarter and first nine months of 2011 was primarily due to higher sales and the factors noted above that affected gross profit.
Business Segment Results of Operations
The following is a discussion of net sales, operating profit and operating profit margin by business segment which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to integration charges see Note 3 to the Condensed Consolidated Financial Statements. For additional information related to acquired businesses see Note 2 to the Condensed Consolidated Financial Statements.
Electrical Americas
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
1,074

 
$
967

 
11
%
 
$
3,071

 
$
2,663

 
15
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
156

 
141

 
11
%
 
432

 
366

 
18
%
Operating margin
14.5
%
 
14.6
%
 
 
 
14.1
%
 
13.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
3

 
$

 
 
 
$
7

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
159

 
$
141

 
13
%
 
$
439

 
$
368

 
19
%
Operating margin
14.8
%
 
14.6
%
 
 
 
14.3
%
 
13.8
%
 
 
Net sales increased 11% in the third quarter of 2011 compared to the third quarter of 2010 due to an increase of 9% in core sales, an increase of 1% from the acquisition of businesses, and an increase of 1% from the favorable impact of foreign exchange. End markets increased 11% in the third quarter of 2011 compared to the same period in 2010. Net sales increased 15% in the first nine months of 2011 compared to the first nine months of 2010 due to an increase of 11% in core sales, an increase of 3% from the acquisition of businesses, and an increase of 1% from the favorable impact of foreign exchange. The increase in net sales in both the third quarter and first nine months of 2011 was due to strong growth in the markets served by the Electrical Americas segment. Eaton now anticipates its Electrical Americas markets will grow by 8% for all of 2011.
Operating profit before acquisition integration charges in the third quarter of 2011 increased 13% from the third quarter of 2010. Operating profit before acquisition integration charges in the first nine months of 2011 increased 19% from the first nine months of 2010. The increase in both the third quarter and first nine months of 2011 was largely due to higher net sales as noted above. This increase was partially offset by higher raw material and commodity costs, including losses associated with commodity hedge contracts due to significant declines in metal prices primarily during the last two weeks in September. These losses reduced operating margin before acquisition integration charges by 1.0 percentage points.

18

Table of Contents

Electrical Rest of World
 
Three months ended
September 30
 
Increase
(decrease)
 
Nine months ended
September 30
 
Increase
(decrease)
 
2011
 
2010
 
 
2011
 
2010
 
Net sales
$
755

 
$
707

 
7
 %
 
$
2,285

 
$
1,980

 
15
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
62

 
81

 
(23
)%
 
209

 
183

 
14
%
Operating margin
8.2
%
 
11.5
%
 
 
 
9.1
%
 
9.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$

 
$
6

 
 
 
$
1

 
$
20

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
62

 
$
87

 
(29
)%
 
$
210

 
$
203

 
3
%
Operating margin
8.2
%
 
12.3
%
 
 
 
9.2
%
 
10.3
%
 
 
Net sales increased 7% in the third quarter of 2011 compared to the third quarter of 2010 due to an increase of 7% from the favorable impact of foreign exchange, an increase of 2% from the acquisition of a business, offset by a decrease in core sales of 2%. End markets grew 1% in the third quarter of 2011 compared to the third quarter of 2010. Net sales increased 15% in the first nine months of 2011 compared to the first nine months of 2010 due to an increase of 8% from the favorable impact of foreign exchange, an increase in core sales of 6%, and an increase of 1% from the acquisition of businesses. Eaton now anticipates its Electrical Rest of World markets will grow by 6% for all of 2011.
Operating profit before acquisition integration charges in the third quarter of 2011 decreased 29% from the third quarter of 2010. Operating profit in the third quarter was negatively impacted by a large decrease in the residential solar market and losses associated with commodity hedge contracts due to significant declines in metal prices primarily during the last two weeks in September. These losses reduced operating margin before acquisition integration charges by 1.5 percentage points. Operating profit before acquisition integration charges in the first nine months of 2011 increased 3% from the first nine months of 2010 primarily due to higher sales.
Hydraulics
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
717

 
$
583

 
23
%
 
$
2,130

 
$
1,641

 
30
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
109

 
76

 
43
%
 
335

 
207

 
62
%
Operating margin
15.2
%
 
13.0
%
 
 
 
15.7
%
 
12.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
1

 
$

 
 
 
$
1

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
110

 
$
76

 
45
%
 
$
336

 
$
207

 
62
%
Operating margin
15.3
%
 
13.0
%
 
 
 
15.8
%
 
12.6
%
 
 
Net sales in the third quarter of 2011 increased 23% compared to the third quarter of 2010 due to an increase of 13% in core sales, an increase of 7% from the acquisition of businesses and an increase of 3% from the favorable impact of foreign exchange. Global hydraulics markets grew 14% over the third quarter of 2010, with U.S. markets up 18% and markets outside the U.S. up 11%. Net sales in the first nine months of 2011 increased 30% compared to the first nine months of 2010 due to an increase in core sales of 22%, an increase of 4% from the acquisition of businesses, and an increase of 4% from the favorable impact of foreign exchange. Eaton now anticipates its Hydraulics markets will grow by 17% for all of 2011.

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Operating profit before acquisition integration charges in the third quarter of 2011 increased 45% from the third quarter of 2010. Operating profit before acquisition integration charges in the first nine months of 2011 increased 62% from the first nine months of 2010. The increase in both the third quarter and first nine months of 2011 was primarily due to higher sales volumes, partially offset by higher raw material and commodity costs.
Aerospace
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
420

 
$
390

 
8
%
 
$
1,218

 
$
1,136

 
7
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
71

 
60

 
18
%
 
166

 
157

 
6
%
Operating margin
16.9
%
 
15.4
%
 
 
 
13.6
%
 
13.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$

 
$
1

 
 
 
$

 
$
3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
71

 
$
61

 
16
%
 
$
166

 
$
160

 
4
%
Operating margin
16.9
%
 
15.6
%
 
 
 
13.6
%
 
14.1
%
 
 
Net sales in the third quarter of 2011 increased 8% compared to the third quarter of 2010 due to an increase in core sales of 7% and an increase of 1% from the favorable impact of foreign exchange. End markets grew 7% in the third quarter of 2011 compared to the third quarter of 2010. Net sales in the first nine months of 2011 increased 7% compared to the first nine months of 2010 due to an increase in core sales of 6% and an increase of 1% from the favorable impact of foreign exchange. Growth in both the third quarter and first nine months of 2011 was primarily driven by higher customer demand in the commercial OEM and aftermarket. Eaton now anticipates its Aerospace markets will grow by 5% for all of 2011.
Operating profit before acquisition integration charges in the third quarter of 2011 increased 16% from the third quarter of 2010. Operating margin before acquisition integration charges increased 1.3 percentage points from 15.6% in the third quarter of 2010 to 16.9% in the third quarter of 2011, reflecting the benefits from higher sales volume and growth in the commercial aftermarket. Operating profit before acquisition integration charges in the first nine months of 2011 increased 4% from the first nine months of 2010. Operating margin before acquisition integration charges decreased 0.5 percentage points from 14.1% in the first nine months of 2010 to 13.6% in the first nine months of 2011. The decrease in the first nine months of 2011 was primarily due to increased expenses stemming from changes in scope, program delays, and execution of new customer programs during the first half of 2011, which were partially offset by the benefits from higher sales volume and growth in the commercial aftermarket.
Truck
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
715

 
$
534

 
34
%
 
$
1,964

 
$
1,479

 
33
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
139

 
74

 
88
%
 
349

 
179

 
95
%
Operating margin
19.4
%
 
13.9
%
 
 
 
17.8
%
 
12.1
%
 
 
Net sales increased 34% in the third quarter of 2011 compared to the third quarter of 2010 due to an increase in core sales of 31% and an increase of 3% from the favorable impact of foreign exchange. End markets grew 25% in the third quarter of 2011 compared to the third quarter of 2010. U.S. markets grew 51% while markets outside the U.S. grew 7%. Net sales increased 33% in the first nine months of 2011 compared to the first nine months of 2010 due to an increase in core sales of 28% and an increase of 5% from the favorable impact of foreign exchange. The increase in core sales reflects the continuing rebound in global end markets. Eaton now anticipates its Truck markets will grow by 24% for all of 2011.

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Operating profit in the third quarter of 2011 increased 88% from the third quarter of 2010. Operating profit in the first nine months of 2011 increased 95% from the first nine months of 2010. The increase in operating profit in both the third quarter and first nine months of 2011 was primarily due to higher sales volumes in 2011.
Automotive
 
Three months ended
September 30
 
 
 
Nine months ended
September 30
 
 
 
2011
 
2010
 
Increase
 
2011
 
2010
 
Increase
Net sales
$
442

 
$
390

 
13
%
 
$
1,348

 
$
1,153

 
17
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
62

 
39

 
59
%
 
167

 
120

 
39
%
Operating margin
14.0
%
 
10.0
%
 
 
 
12.4
%
 
10.4
%
 
 
Net sales increased 13% in the third quarter of 2011 compared to the third quarter of 2010 due to an increase in core sales of 11% and an increase of 2% from the favorable impact of foreign exchange. The increase in core sales reflects the strong global automotive markets, which grew 8% in the third quarter of 2011 compared to the third quarter of 2010. U.S. markets grew 13% while markets outside the U.S. grew 6%. Net sales increased 17% in the first nine months of 2011 compared to the first nine months of 2010 due to an increase in core sales of 13% and an increase of 4% from the favorable impact of foreign exchange. The increase in core sales in the first nine months of 2011 is due to the same factors noted above. Eaton now anticipates its Automotive markets will grow by 10% for all of 2011.
Operating profit in the third quarter of 2011 increased 59% from the third quarter of 2010. Operating profit in the first nine months of 2011 increased 39% from the first nine months of 2010. The increase in operating profit in both the third quarter and first nine months of 2011 was primarily due to higher sales volumes and the resulting manufacturing efficiencies.
Corporate Expense
 
Three months ended
September 30
 
Increase
(decrease)
 
Nine months ended
September 30
 
Increase
(decrease)
 
2011
 
2010
 
 
2011
 
2010
 
Amortization of intangible assets
$
47

 
$
46

 
2
 %
 
$
143

 
$
134

 
7
 %
Interest expense-net
29

 
33

 
(12
)%
 
92

 
102

 
(10
)%
Pension and other postretirement benefits expense
35

 
30

 
17
 %
 
105

 
91

 
15
 %
Other corporate expense-net
56

 
57

 
(2
)%
 
155

 
142

 
9
 %
Total corporate expense
$
167

 
$
166

 
1
 %
 
$
495

 
$
469

 
6
 %
Total Corporate expense increased 1% in the third quarter of 2011 to $167 from $166 in the third quarter of 2010 principally due to a 17% increase in Pension and other postretirement benefits expense related to changes in the discount rate and asset return assumptions for 2011, partially offset by a 12% decrease in Interest expense-net associated with lower interest rates. Total Corporate expense increased 6% in the first nine months of 2011 to $495 from $469 in the first nine months of 2010 due to the same factors noted above.

LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Financial Condition and Liquidity
Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk. The Company maintains access to the commercial paper markets through credit facilities that support commercial paper borrowings. There were no borrowings outstanding under these revolving credit facilities at September 30, 2011. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business.

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During the second quarter in 2011, Eaton completed the issuance of $300 floating rate senior unsecured Notes due June 16, 2014. The Company also completed the refinancing of a $500, five-year revolving credit facility which maintains long-term revolving credit facilities at a total of $1.5 billion. For additional information on these financing transactions, see Note 5 to the Condensed Consolidated Financial Statements.
Eaton was in compliance with each of its debt covenants as of September 30, 2011 and for all periods presented.
Undistributed Assets of Non-U.S. Subsidiaries
At September 30, 2011, approximately 79% of the Company's consolidated cash and short-term investments resided in non-U.S. locations. These funds are considered permanently reinvested to be used to expand operations either organically or through acquisitions outside the U.S. The largest growth areas that are expected to require capital are in developing foreign markets such as Africa, Brazil, China, India, the Middle East and Southeast Asia. The Company's U.S. operations generate cash flow sufficient to satisfy U.S. operating requirements. The Company does not intend to repatriate any significant amounts of cash to the U.S. in the foreseeable future.
Sources and Uses of Cash Flow
Operating Cash Flow
Net cash provided by operating activities was $689 in the first nine months of 2011, a decrease of $38 compared to $727 in the first nine months of 2010. Operating cash flows in 2011 were primarily impacted by higher working capital requirements compared to 2010 as well as contributions of $100 to other postretirement benefits plans that were not contributed in 2010. Partially offsetting these uses of cash were higher net income in 2011, which resulted from increased sales due to the global economic recovery that continued in 2011 and the positive effect of recent changes in the Company’s cost structure. For additional information on postretirement benefits plans, see Note 6 to the Condensed Consolidated Financial Statements.
Investing Cash Flow
Net cash used in investing activities was $409 in the first nine months of 2011, a decrease of $23 compared to $432 in the first nine months of 2010. During the first nine months of 2011, capital expenditures increased to $384 in 2011 from $207 in the first nine months of 2010 and cash paid for acquisitions of businesses increased to $298 from $172 in the first nine months of 2010. Higher capital expenditures were due to the Company's increased investments in property, plant and equipment to facilitate growth. These uses of cash were more than offset by cash proceeds of $272 from the sale of short-term investments compared to purchases of $47 in the first nine months of 2010. For additional information on business acquisitions see to Note 2 to the Condensed Consolidated Financial Statements.
Financing Cash Flow
Net cash used in financing activities was $329 in the first nine months of 2011, an increase of $103 compared to $226 in the first nine months of 2010. The increase was primarily due to common share repurchases of $343 during 2011 and an increase of $83 in cash dividends paid in 2011 to Eaton common shareholders, partially offset by proceeds received from a $300 debt issuance completed by Eaton during the second quarter of 2011. Higher cash dividends paid was due to an increase in the quarterly cash dividend paid per common share from $0.29 to $0.34, announced during the first quarter of 2011. For additional information on share repurchases see to Note 9 to the Condensed Consolidated Financial Statements and Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.

OTHER MATTERS
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At September 30, 2011, the Company has a total accrual of 67 Brazilian Reais related to this matter, comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($32 based on current exchange rates) and an additional 7 Brazilian Reais recognized in 2011 ($4 based on current exchange rates) due to subsequent accruals for interest and inflation. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability. In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton Holding and Eaton Ltda. filed appeals on various issues to the Superior Court of Justice in Brasilia. On September 27, 2011, the Superior Court of Justice accepted two of the appeals and will hear those appeals in due course. Another appeal remains pending in the lower appellate court.

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Table of Contents

On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court for Delaware. The action sought damages, which would be trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion was denied on March 10, 2011. On March 14, 2011, Eaton filed a motion for entry of final judgment of liability, zero damages and no injunctive relief. That motion was denied on June 9, 2011. On August 19, 2011, the Court entered final judgment of liability but awarded zero damages to plaintiffs. The Court also entered an injunction prohibiting Eaton from offering rebates or other incentives based on purchasing targets but stayed the injunction pending appeal. Eaton has appealed the liability finding and the injunction to the Third Circuit Court of Appeals. Meritor has cross-appealed the finding of zero damages.

CRITICAL ACCOUNTING POLICIES
Goodwill and Indefinite Life Intangible Assets
In September 2011, the Financial Accounting Standards Board issued a revised standard on testing goodwill for impairment. The revised standard allows an entity to first assess the carrying value of goodwill based on qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the unit's carrying amount. If, based on a qualitative assessment, the fair value of a reporting unit is more likely than not lower than its carrying value, the entity must then test goodwill from a quantitative perspective similar to prior guidance. This standard is effective for 2012, with early adoption permitted. Eaton elected to adopt this standard for its 2011 annual impairment testing.
Goodwill is tested for impairment annually as of July 1 at the reporting unit level, which is equivalent to Eaton's operating segments. As disclosed in Eaton's 2010 Form 10-K, impairment testing for 2010 was performed from a quantitative perspective using a discounted cash flow model to estimate the fair value of each operating segment. For 2010, the fair value of Eaton's reporting units substantially exceeded the respective carrying values.
Impairment testing for 2011 was performed by assessing certain qualitative trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data and other relevant qualitative factors. These trends and factors were compared to and based on the assumptions used in the quantitative assessment performed in 2010. For 2011, it is more likely than not that the fair value of Eaton's reporting units continues to substantially exceed the respective carrying amount.

FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning the performance in 2011 of Eaton’s worldwide end markets. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “guidance”, “intend”, “may”, “possible”, “potential”, “predict”, “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’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 us; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; increases in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; stock and commodity market and currency 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.

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Table of Contents

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See Note 11 of the Notes to the Condensed Consolidated Financial Statements for changes in exposures to market risk since December 31, 2010.

ITEM 4.
CONTROLS AND PROCEDURES.
      Pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 (the Exchange Act), an evaluation was performed, under the supervision and with the participation of Eaton’s management, including Alexander M. Cutler - Chairman, Chief Executive Officer and President; and Richard H. Fearon - Vice Chairman and Chief Financial and Planning Officer, of the effectiveness of the design and operation of Eaton’s disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of September 30, 2011.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under 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 include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There were no changes in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, Eaton’s internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
8.3 million shares were repurchased in 2011 at a total purchase price of $343. During the third quarter of 2011, Eaton repurchased 7.0 million of the 8.3 million common shares in the open market at a total purchase price of $275. These shares were repurchased under the program announced on January 22, 2007 (2007 Program). A summary of the shares repurchased in the third quarter of 2011 follows:
Month
 
Total number
of shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased as
part of publicly
announced
plans or programs
 
Maximum number
of shares that may
yet be purchased
under the plans
or programs 1
July
 
103,700

 
$
48.15

 
103,700

 
7,581,870

August
 
5,175,419

 
39.62

 
5,175,419

 
2,406,451

September
 
1,731,800

 
37.73

 
1,731,800

 
674,651

Total
 
7,010,919

 
$
39.28

 
7,010,919

 
 
 
 
 
 
 
 
 
 
 
1 As adjusted for the two-for-one stock split announced on January 27, 2011
On September 28, 2011, Eaton's Board of Directors approved a 20 million common share repurchase program (2011 Program), replacing the 2007 Program. The 2011 Program authorizes the purchase of up to 20 million shares, not to exceed an aggregate purchase price of $1.25 billion. The common shares are expected to be repurchased over time, depending on market conditions, the market price of common shares, capital levels and other considerations. The 2011 program expires on September 27, 2016. No shares were repurchased under this program in the third quarter of 2011.
 
ITEM 6.
EXHIBITS.
Exhibits — See Exhibit Index attached.

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Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
EATON CORPORATION
 
 
 
 
Registrant
 
 
 
 
 
 
Date:
October 26, 2011
By:
/s/ Richard H. Fearon
 
 
 
 
Richard H. Fearon
 
 
 
 
Vice Chairman and Chief Financial and Planning Officer
 
 
 
(On behalf of the Registrant and as Principal Financial Officer)
 
 
 
 
 


25

Table of Contents

Eaton Corporation
Third Quarter 2011 Report on Form 10-Q
Exhibit Index
3 (a)
 
Amended Articles of Incorporation (amended and restated as of April 27, 2011) — Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2011
 
 
 
3 (b)
 
Amended Regulations (amended and restated as of April 27, 2011) — Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2011
 
 
 
4
 
Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its other long-term debt
 
 
 
12
 
Ratio of Earnings to Fixed Charges — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.1
 
Certification of Chief Executive Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.2
 
Certification of Chief Financial Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.1
 
Certification of Chief Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.2
 
Certification of Chief Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
101.INS
 
XBRL Instance Document *
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document *
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document *
 
 
 
101.DEF
 
XBRL Taxonomy Extension Label Definition Document *
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document *
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document *
_______________________________
*
 
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended September 30, 2011 and 2010, (ii) Consolidated Statements of Income for the nine months ended September 30, 2011 and 2010, (iii) Condensed Consolidated Balance Sheets at September 30, 2011 and December 31, 2010, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 and (v) Notes to Condensed Consolidated Financial Statements for the nine months ended September 30, 2011.
In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.


26