Document LKkgjomky72MDyXqEgGzjdX03

Eaton Corporation Financial Review The components of pension expense for the years ended December 31 follow (in millions): 1997 1996 1995 Service coot--benefits earned during year Interest cost on projected benefit obligation Actual return on assets Net amortization and deferral * 164) (111) 375 cm $(58) (105) 350 COO) $ (51) (104) 347 014) Curtailment loss Settlement gem (11) (13) (22) (1) 68 6 6 t 56 $ (7) $ (16) In 1997, the curtailment loss and settlement gain relate primarily to the sales of AIL Systems Inc. and the Appliance Controls business. The pension asset (liability), by funded status of the plan, at Decem ber 31 follows On millions): 1997 1996 cw Mad (Mr taoad OarMad Undar Mdaf Accumulated pension benefit obligation Vested Nonvested *1.127 $ 178 91 8 $1,186 $ 177 94 7 Value of future salary projections 1,218 134 166 1280 25 152 184 14 "`"'otal projected pension benefit obligation Fair value of plan assets 1,352 1,931 211 1,432 89 1,852 198 92 Plan assets In excess of (less than) projected benefit obligation Unamortized Initial net asset Net (gain) loss Prior service cost Adjustment to recognize minimum liability 579 (7) (431) 18 (122) (4) 36 14 (8) 420 (14) (326) 15 (106) (5) 12 16 (11) $ 159 $ (84) $ 95 $ (94) Actuarial assumptions used in the calculation of the (Tension asset (liability) are as follows: 1997 1996 1995 Discount rate 7.00* 725% 725* Compensation growth rate 4.50* 4.70* 4.70* Long-term rote of return on plan assets 10H 10* 9.50* Plan assets are invested In equity and fixed income securities and other instruments. Underfunded plans are associated principally with operations outside the United States. The changes in assumed rates at the end of 1997 had the effect of increasing the accumulated pension benefit obligation by $29 million with an offsetting increase in the unamortized net loss. This change will not have a material effect on future expense. stretirement Benefit Plans Other Than Pensions Generally, United States employees become eligible for postretirement benefits other than pensions, primarily health care and life insurance. upon retirement. These benefits are payable for life, although the Com pany retains the right to modify or terminate the plans providing these benefits. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features, including deductibles and co-payments. Certain plans limit the annual amount of the Com pany's future contributions towards employees' postretirement health care benefits. Company policy is to pay claims as they are incurred since, unlike pensions, there is no effective method to obtain a tax deduction for prefunding of these benefits under existing United States income tax regulations. Expense for postretirement benefits other than pensions for the years ended December 31 follows On millions): 1997 1996 1995 Service oost--benefits earned during year Interest cost on projected benefit obligation Amortization *(13) (49) 3 *(12) (47) 5 *(12) (9) 8 Curtailment gain Settlement loss (59) (54) (S3) 16 (12) *(55) *(54) *(53) The curtailment gain and settlement loss relate primarily to the sales of ail Systems Inc. and the Appliance Controls business. The liability for postretirement benefit plans other than pensions at December 31 follows On millions): 1997 1996 Accumulated postratirement benefit obligation Retirees Efigfcle plan participants Non-eflglbie plan participants Unamortized Prior service cost Net loss *470 90 177 *465 56 182 29 (184) S3 (138) $582 $820 Actuarial assumptions used in the calculation of the liability for postretirement benefits other than pensions are as follows: 1997 1996 1995 Oiscount rate Projected health care cost trend rate Ultimate trend rate Year ultimate trend rate Is achieved 7.00* 8* 4.75* 2002 725* 9* 5* 2001 725* 10* S* 2001 The changes in assumed rates had the effect of increasing the accu mulated postretirement benefit obligation (APBO) by $13 million with an offsetting increase in the unamortized net loss. These changes will have an immaterial effect on future expense. An increase of 1% in assumed health care cost trend rates would increase the accumulated postretire ment benefit obligation as of December 31.1997 by $37 million and the net periodic cost for 1997 by $3 million. Protection of the Environment The Company has several policies in place to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. For example, the Company has, at each of its facilities, a person responsible for environmental, health and safety (EHS) matters.