SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 11-K
ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934 (Fee required)
For the fiscal year ended December 31, 2003
Or
[ ] Transition report pursuant to Section 15(d) of the Securities Exchange
Act of 1934 (Fee required)
For the transition period from _____________ to ___________
Commission file number ____________________________________
A. Full title of the plan and the address of the plan, if different
from that of the issuer named below:
EATON SAVINGS PLAN
B. Name of issuer of the securities held pursuant to the plan and the
address of its principal executive office:
Eaton Corporation, 1111 Superior Avenue,
Cleveland, Ohio 44114-2584
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act of
1934, the trustees (or other persons who administer the employee benefit plan)
have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
(Name of Plan)
EATON SAVINGS PLAN
Date: June 28, 2004 By: Eaton Corporation Pension
Administration Committee
By: /s/ B. K. Rawot
--------------------------
Signature)
B. K. Rawot
Vice President and Controller
Eaton Corporation
AUDITED FINANCIAL STATEMENTS AND
SUPPLEMENTAL SCHEDULE
Eaton Savings Plan
December 31, 2003 and 2002 and Year ended December 31, 2003
With Report of Independent Registered Public Accounting Firm
Eaton Savings Plan
Audited Financial Statements and Supplemental Schedule
December 31, 2003 and 2002 and
Year ended December 31, 2003
CONTENTS
Report of Independent Registered Public Accounting Firm......................... 1
Audited Financial Statements
Statements of Net Assets Available for Benefits................................. 2
Statement of Changes in Net Assets Available for Benefits....................... 3
Notes to Financial Statements................................................... 4
Supplemental Schedule
Schedule H, line 4i--Schedule of Assets (Held at End of Year)................... 11
Report of Independent Registered Public Accounting Firm
Pension Administration Committee and the
Pension Investment Committee - Eaton Corporation
We have audited the accompanying statements of net assets available for benefits
of the Eaton Savings Plan as of December 31, 2003 and 2002, and the related
statement of changes in net assets available for benefits for the year ended
December 31, 2003. These financial statements are the responsibility of the
Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
December 31, 2003 and 2002, and the changes in its net assets available for
benefits for the year ended December 31, 2003, in conformity with U.S. generally
accepted accounting principles.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
(held at end of year) as of December 31, 2003, is presented for purposes of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
ERNST & YOUNG LLP
Cleveland, Ohio
June 4, 2004
1
Eaton Savings Plan
Statements of Net Assets Available for Benefits
DECEMBER 31
2003 2002
--------------- ---------------
ASSETS
Investments, at fair value:
Plan interest in Eaton Employee
Savings Trust $ 1,900,264,929 $ 1,569,154,366
Participant notes receivable 43,599,671 42,662,067
--------------- ---------------
Total investments 1,943,864,600 1,611,816,433
Receivables:
Contributions:
Participants 242,894 -
Employer 121,006 -
Interest 17,206 -
--------------- ---------------
Total receivables 381,106 -
--------------- ---------------
Net assets available for benefits $ 1,944,245,706 $ 1,611,816,433
=============== ===============
See notes to financial statements.
2
Eaton Savings Plan
Statement of Changes in Net Assets Available for Benefits
Year ended December 31, 2003
ADDITIONS
Investment income:
Interest $ 3,034,077
Plan interest in Eaton Employee Savings
Trust investment gain 359,972,164
---------------
363,006,241
Contributions:
Employer 33,403,333
Participants 75,606,402
Rollovers 16,207,966
---------------
Total contributions 125,217,701
Transfer from other plan 112,457
---------------
Total additions 488,336,399
DEDUCTIONS
Benefits paid to participants 155,530,331
Administrative expenses 376,795
---------------
Total deductions 155,907,126
---------------
Net increase 332,429,273
Net assets available for benefits at beginning of year 1,611,816,433
---------------
Net assets available for benefits at end of year $ 1,944,245,706
===============
See notes to financial statements.
3
Eaton Savings Plan
Notes to Financial Statements
December 31, 2003 and 2002 and
Year ended December 31, 2003
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The financial statements of the Eaton Savings Plan (the Plan) are prepared under
the accrual method of accounting.
INVESTMENT VALUATION AND INCOME RECOGNITION
Effective January 3, 2002, trustee responsibilities for the Plan were
transferred from Key Trust Company of Ohio, N.A., to Fidelity Management Trust
Company, and the Plan's investments, excluding participant loans, were invested
in the Eaton Employee Savings Trust (Master Trust), which was established for
the investment of assets of the Plan and the Eaton Personal Investment Plan. The
fair value of the Plan's interest in the individual funds of the Master Trust is
based on the value of the Plan's interest in the fund as of the transfer date
plus actual contributions and allocated investment income (loss) less actual
distributions.
The investments of the Plan, except for the Aeroquip Vickers Fixed Income Fund
in the Master Trust, are stated at fair value. Securities traded on a national
securities exchange are valued at the last reported sales price on the last
business day of the plan year. Investments traded in the over-the-counter market
and listed securities for which no sale was reported on that date are valued at
the average of the last reported bid and asked prices. Common/collective trust
funds and pooled separate accounts are valued at the redemption value of units
held at year-end. Participant loans are valued at cost, which approximates fair
value. The Aeroquip Vickers Fixed Income Fund invests primarily in investment
contracts issued by insurance companies. The investment contracts within the
Aeroquip Vickers Fixed Income Fund are stated at contract value, which
approximates fair value.
Purchases of sales and securities are recorded on a trade-date basis.
ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates that affect
the amounts reported in the financial statements and accompanying notes. Actual
results are not expected to differ from these estimates.
4
Eaton Savings Plan
Notes to Financial Statements (continued)
2. DESCRIPTION OF PLAN
Effective July 1, 1974, Eaton Corporation (Eaton, the Company, or the Plan
Sponsor) established the Plan. The Plan was established to encourage eligible
employees to make systematic savings through payroll deductions, to provide
additional security at retirement and to acquire a proprietary interest in the
Company. Effective July 5, 1989, the portion of the Plan attributable to Company
contributions was designed to be invested primarily in Eaton Common Shares and
constitute an employee stock ownership plan within the meaning of Code Section
4975(e)(7). Effective January 1, 2002, the Plan was amended and restated. In
conjunction with the amendment and restatement, the Plan was renamed the Eaton
Savings Plan.
The Plan generally provides that an Eaton employee who is in the regular service
of a class of an employee in a division or group to which Eaton Corporation has
extended eligibility for membership in the Plan (other than a temporary employee
who is hired for a specific, limited period of time or for the performance of a
specific, limited assignment or employees covered by a collective bargaining
agreement that does not specify coverage under the Plan) will be eligible to
participate on any date established in accordance with administrative procedures
which follows the date an employee first incurs an hour of service.
Employees may make a combination of before-tax and after-tax contributions
ranging from 1% to 30% of their compensation. Effective May 1, 2003, catch-up
contributions were permitted in the Plan, allowing participants age 50 and older
to defer an additional amount of their compensation as prescribed by the
Internal Revenue Code. Participants of the Plan receive a Company matching
contribution of 100% of the first 3% of their compensation, plus 50% of the next
2% of compensation. Employees are 100% vested in their matching contributions.
Employee contributions may be invested in any of the fund options available
under the Plan. Participants may reallocate their accumulated contributions
daily among the various funds consistent with the ratios specified in the Plan.
5
Eaton Savings Plan
Notes to Financial Statements (continued)
2. DESCRIPTION OF PLAN (CONTINUED)
Company matching contributions made prior to January 1, 2002 were invested and
held in the Eaton Common Shares Fund. Company matching contributions made on or
after January 1, 2002 are invested in the same manner as participants' before or
after tax contributions. Employees may elect to transfer the account balances
related to Company matching contributions made prior to January 1, 2002 to other
investment funds offered by the Plan, in gradual phases, such that as of January
1, 2005, the entire account balance related to pre-January 1, 2002 Company
matching contributions will be eligible to be transferred.
Each participant's account is credited with the participant's contributions and
Company matching contributions and allocation of the Plan's earnings and is
charged with an allocation of administrative expenses. Allocations are based on
participant account balances. The benefit to which a participant is entitled is
the benefit that can be provided from the participant's account. Participants
are immediately vested in their contributions and actual earnings thereon. On
termination of service, a participant is eligible to receive a lump-sum amount
equal to the value of his account.
Participants may borrow from their fund accounts up to the lesser of $50,000 or
50% of their vested account balance (excluding any contributions made under a
Savings Plan Individual Retirement Account or Company contributions made in the
previous 24 months), reduced by their highest outstanding loan balance during
the preceding 12 months. Loan terms range from 1-5 years except for loans used
for the purchase of a primary residence. The loans are secured by the balance in
the participant's account and bear interest at a rate based on the prime
interest rate as determined daily by the Trustee. Principal and interest are
paid through payroll deductions.
All administrative and transaction costs, management fees and expenses of the
Plan are paid by the trustee from the Master Trust unless such costs, fees and
expenses are paid by the Company. The Company elected to pay certain
administrative costs during 2003 on behalf of the Plan.
Eaton may amend, modify, suspend or terminate the Plan. No amendment,
modification, suspension or termination of the Plan shall have the effect of
providing that any amounts then held under the Plan may be used or diverted to
any purpose other than for the exclusive benefit of members or their
beneficiaries.
6
Eaton Savings Plan
Notes to Financial Statements (continued)
2. DESCRIPTION OF PLAN (CONTINUED)
Information about the Plan is contained in the Plan document, which is available
from the Company's Human Resources Department upon request.
3. INVESTMENTS
Effective January 3, 2002, Fidelity Management Trust Company, trustee and
recordkeeper of the Plan, holds the Plan's investment assets and executes
investment transactions, and all investment assets of the Plan, except for
participant loans, are pooled for investment purposes in the Master Trust.
A summary of the investments of the Master Trust is as follows:
DECEMBER 31
2003 2002
------------------- -------------------
Registered investment companies $ 1,057,070,016 $ 661,423,979
Eaton common shares 564,210,052 492,065,122
Insurance company general accounts 144,670,781 272,326,947
U.S. government securities 125,329,900 92,586,380
Corporate debt instruments 49,023,353 56,633,963
Interest-bearing cash 33,503,543 31,414,358
Axcelis common shares - 19,003,919
Pooled separate accounts 411,641 1,473,735
------------------- -------------------
Total investments $ 1,974,219,286 $ 1,626,928,403
=================== ===================
The Plan had a 96.2% and 96.4% interest in the investments of the Master Trust
as of December 31, 2003 and 2002, respectively.
7
Eaton Savings Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Investment income and administrative expenses relating to the Master Trust are
allocated to the individual plans based upon the average balance invested by
each plan in each of the individual funds of the Master Trust. A summary of the
Master Trust's net investment income allocated to the participating plans for
the year ended December 31, 2003 is as follows:
Interest and dividend income $ 27,653,824
Net appreciation in fair value of investments:
Eaton Common Shares Fund 168,972,886
Registered Investment Companies 170,719,308
Eaton Fixed Income Fund 3,458,665
---------------
$ 370,804,683
===============
At December 31, 2003, the Eaton Fixed Income Fund was comprised of U.S.
government securities (65%), corporate debt instruments (25%), interest-bearing
cash (9%), and pooled separate accounts (1%).
The Eaton Common Shares Fund, which includes the Eaton common shares and a
portion of the interest-bearing cash, contains participant account balances that
are both participant-directed and nonparticipant-directed. Because the fund
contains balances that are nonparticipant-directed, the entire fund is
considered nonparticipant-directed for disclosure purposes.
Information about the net assets and the significant components of the changes
in net assets relating to the nonparticipant-directed investments for the Plan
are as follows:
DECEMBER 31
2003 2002
---------------- ---------------
Net assets:
Investment in Eaton Common Shares Fund $ 569,969,452 $ 495,202,378
Contribution and loan repayment receivable 118,342 -
---------------- ---------------
$ 570,087,794 $ 495,202,378
================ ===============
8
Eaton Savings Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
YEAR ENDED
DECEMBER 31,
2003
---------------
Changes in net assets:
Contributions $ 32,101,708
Net investment gain from the Eaton Common Shares Fund 176,731,128
Net transfers to participant-directed funds (88,605,506)
Distributions to participants (38,499,899)
Loan withdrawal (6,675,895)
Administrative expenses (166,120)
---------------
Net increase $ 74,885,416
===============
4. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated May 16, 2003, stating that the Plan is qualified under Section 401(a) of
the Internal Revenue Code (the Code) and, therefore, the related trust is exempt
from taxation. Subsequent to this determination by the Internal Revenue Service,
the Plan was amended. Once qualified, the Plan is required to operate in
conformity with the Code to maintain its qualification. The Plan Administrator
believes the Plan is being operated in compliance with the applicable
requirements of the Code and, therefore, believes that the Plan, as amended, is
qualified and the related trust is tax exempt.
5. TRANSACTIONS WITH PARTIES-IN-INTEREST
Party-in-interest transactions included the investments in the common stock of
Eaton and the investment funds of the trustee and the payment of administrative
expenses by the Company. Such transactions are exempt from being prohibited
transactions.
During 2003, the Master Trust received $10,539,782 in common stock dividends
from the Company.
9
Eaton Savings Plan
Notes to Financial Statements (continued)
5. TRANSACTIONS WITH PARTIES-IN-INTEREST (CONTINUED)
On June 30, 2000, Eaton reorganized its semiconductor equipment operations into
a wholly owned subsidiary, Axcelis Technologies, Inc. (Axcelis). In July 2000,
Axcelis completed an initial public offering for the sale of 20% of its common
stock shares. On December 29, 2000 Eaton distributed its remaining interest in
Axcelis to Eaton shareholders as a dividend (spin-off), which was tax free to
Eaton and its shareholders for United States income tax purposes. Eaton
shareholders (including the Plan) received 1.179023 shares of Axcelis common
stock per each whole Eaton common share held as of December 6, 2000 and cash
payments for fractional shares. The Axcelis common shares were received by the
Plan on January 5, 2001.
The Plan established an Axcelis Common Stock Fund to hold the shares of Axcelis
common stock received as a dividend. Participants were not allowed to direct
contributions or transfers to the Axcelis Common Stock Fund, but were permitted
to direct the transfer of amounts in the Axcelis Common Stock Fund to other
funds available under the Plan. The Axcelis Common Stock Fund was terminated
subsequent to the close of the market on December 31, 2002. All remaining shares
were liquidated and the assets were invested in a money market fund.
6. RISKS AND UNCERTAINTIES
The Master Trust invests in various investment securities. Investment securities
are exposed to various risks such as interest rate, market and credit risks. Due
to the level of risk associated with certain investment securities, it is at
least reasonably possible that changes in the values of investment securities
will occur in the near term and that such changes could materially affect
participants' account balances and the amounts reported in the statements of net
assets available for benefits.
10
Eaton Savings Plan
EIN: 34-0196300 Plan Number: 055
Schedule H, line 4i--Schedule of Assets
(Held at End of Year)
December 31, 2003
DESCRIPTION OF INVESTMENT
INCLUDING MATURITY DATE,
IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST, COLLATERAL, CURRENT
Lessor or Similar Party Par or Maturity Value Value
-------------------------- ------------------------------ -----------
*Participant notes receivable 5%-10.5%, various maturity dates $43,599,671
===========
*Indicates party-in-interest to the Plan.
11