*
We make a better world work.
2017 Annual Report
*
For over a century, we’ve evolved, both adapting to and
driving changes that have improved our quality of life and
the environment. This year is no exception. We’re inspiring
our employees to think differently about our business and
the positive impact we have on our communities and the
world. From innovative Intelligent Power solutions for things
like microgrids and electric vehicles to connected lighting
for cities and buildings and sensors that improve machinery
performance, we serve the needs of critical markets —
both established and emerging.
Our Intelligent Power solutions are helping our customers
make better decisions. Because working smarter and safer
positions us all for a better tomorrow.
*
We make what matters work.
Eaton.com/whatmatters
2017 Financial Highlights
NET SALES
(Billions of dollars)
ADJUSTED EARNINGS PER
ORDINARY SHARE (Dollars per share)1,2
CASH FLOW FROM OPERATIONS
(Billions of dollars)
NET-DEBT-TO-TOTAL-CAPITAL
RATIO 2
$20.9
$19.7
$20.4
$4.29
$4.21
$4.65
$2.7
$2.6
$2.4
34.3%
33.5%
27.8%
2015
2016
2017
2015
2016
2017
2015
2016
2017
2015
2016
2017
(In millions except for per share data)
Net sales
Net income attributable to Eaton ordinary shareholders
Excluding acquisition integration charges (after-tax)
Adjusted earnings
Adjusted earnings excluding gain from sale
of a business and income from Tax Cuts and Jobs Act1
Net income per share attributable to Eaton ordinary shareholders–diluted
Excluding per share impact of acquisition integration charges (after-tax)
Adjusted earnings per ordinary share
Adjusted earnings per ordinary share excluding gain
from sale of a business and income from Tax Cuts and Jobs Act1
Weighted-average number of ordinary shares outstanding – diluted
Cash dividends declared per ordinary share
Total assets
Total debt
Eaton shareholders’ equity
COMPANY STOCK PERFORMANCE
Eaton
S&P 500 Index
2017
2016 2
2015 2
$ 20,404
2,985
2
$ 2,987
$ 19,747
1,916
3
$ 1,919
$ 20,855
1,972
31
$ 2,003
$ 2,082
$ 1,919
$ 2,003
$ 6.68
0.00
$ 6.68
$ 4.20
0.01
$ 4.21
$ 4.22
0.07
$ 4.29
$ 4.65
$ 4.21
$ 4.29
447.0
$ 2.40
$ 32,623
7,751
17,253
456.5
$ 2.28
$ 30,476
8,277
14,954
467.1
$ 2.20
$ 31,059
8,414
15,249
$300
$250
$200
$150
$100
$50
0
2008
2009 2010 2011 2012 2013 2014 2015 2016 2017
The above graph compares the cumulative total return to shareholders for Eaton and the S&P 500 Index on an initial $100 investment over the time period 2008 through 2017. The shareholder
returns reflected on the graph assume dividends were reinvested as of the ex-dividend date.
1 Adjusted earnings of $2,987 for 2017 were $2,082 excluding $843 from the after-tax gain on the sale of the business related to the Eaton Cummins Automated Transmission Technologies (ECATT) joint venture and $62 of income from the United States Tax Cuts
and Jobs Act (TCJA). Net income and adjusted earnings per ordinary share of $6.68 for 2017 were $4.65 excluding $1.89 per share from the gain on the sale of the ECATT business and $0.14 per share of income from the TCJA.
2 Certain amounts in 2016 and 2015 have been adjusted to reflect the retrospective application of the Company’s change in inventory accounting method.
EATON 2017 Annual Report 3
While reinvesting in the business
In all of our businesses, we continued to invest in technology
leadership and innovation, build on our channel and aftermarket
strengths, and delivered superior value for our customers. Here
are a few examples from the year that show how these strategies
came to life.
• Electrical: Our extensive channel presence and leading service
capabilities helped solve tough customer challenges. We
expanded our digital platforms and capabilities to capitalize on
emerging Internet of Things (IoT) opportunities – investing in an
IoT Center of Excellence to increase product development and
reduce development time. In addition, we laid the groundwork
for our cybersecurity research and testing facility in Pittsburgh to
become the industry’s first lab approved to participate in UL’s Data
Acceptance Program for cybersecurity.
• Aerospace: Our focus on growing our share of the aftermarket
is paying off. Our customers are replacing aging technology with
higher capability products that enable more dynamic operations.
• Hydraulics: We improved our cost competitiveness and expanded
our addressable market by launching new products that serve a
broader set of customer requirements. We are now positioned to
say “yes” more often and build even stronger relationships with
our distribution partners and OEM customers.
• Vehicle: We found an innovative solution to accelerate our growth
by forming a joint venture with Cummins Inc., for automated
transmissions. Our joint venture also launched the new Endurant™
transmission, which is the lightest, most efficient heavy-duty
transmission in the marketplace.
To our shareholders:
I am happy to report that 2017 was another year of progress – our
efforts over the last several years to strengthen our company
are paying off. We are on track to deliver the 5-year financial
commitment that we made, starting in 2015 and ending in 2020,
and we’re delivering on our broader commitments to our customers,
our employees and our communities. Our team is getting better
every day and I’m proud of our accomplishments. Now, allow me
to share some highlights from 2017 and tell you why we are excited
about the future.
We delivered our financial commitments
And making progress on our aspirational goals
2017 was a good year for Eaton, in large part because we did what
Investing in our businesses and delivering on our financial
we said we would and then some.
We increased revenues in the majority of our businesses and total
commitments are both important, but there’s so much more to
Eaton. Every day we are taking steps to make the company a
great place to work, and the world a little better. Here, too, we
organic revenues grew three percent over the prior year. We also
made progress last year.
delivered record segment operating margins of 15.8 percent. And our
net income and adjusted earnings per share were $6.68. Excluding
First, we made good on our pledge to be active stewards of
the gain from the formation of the joint venture with Cummins
the environment – exceeding our greenhouse gas, water use and
Inc., and income from the new U.S. tax bill, our adjusted earnings
waste reduction goals. And, while we’re reducing our environmental
per share were $4.65, 20 cents higher than the mid-point of our
footprint in a major way, we are not stopping there. We’re
guidance. We also completed the largest restructuring program in
compounding the benefits by helping our customers reduce
our company’s history, significantly improving our competitiveness.
theirs as well.
In addition, we achieved record cash flow, making it possible to
Second, we made progress with our employees – improving safety,
reinvest in our businesses and return more than $1.9 billion to
reducing voluntary turnover across the organization, and increasing
shareholders through a combination of share buybacks and
the diversity of our workforce. In fact, Forbes magazine recently
dividends. Our board of directors increased the quarterly cash
recognized us as one of America’s Best Employers for Diversity
dividend, maintaining our attractive yield, and we deployed
and Fortune magazine named us one of the World’s Most Admired
additional capital into our pension plan.
Companies – an indication that we’re not just saying the right things,
we’re doing them, too.
4 EATON 2017 Annual Report
Third, we helped strengthen our communities by investing more than
But that’s not all. We’re also looking forward to participating in the
$11.4 million in local community organizations. We also established
ever increasing trend of electrification of mobile vehicles – cars,
the Eaton Qualified Disaster Relief Fund at our employees’ request
trucks, construction and agricultural equipment, and airplanes to
to help colleagues who lost or suffered significant damage to their
name a few. Almost everything we do in our Electrical business
homes as a result of hurricanes Harvey and Maria. Nothing made
today is applicable to the emerging opportunity we see in mobile
me prouder during the year than seeing our employees respond to
vehicles. Our pedigree in serving these markets, when added to our
these disasters.
proven electrical technologies, creates a powerful combination. And,
The passion our employees have for doing what’s right is one of
the reasons why I’m so proud to lead this organization.
And we’re not stopping there. We are continuing on our journey
as a result, we are creating a new segment that we call eMobility.
Our future is promising
Our corporate strategy for creating long-term value has not changed.
• We will focus on strategic growth initiatives by developing
technology leadership, converting on our channel and service
strength, and delivering superior value to our customers.
to become a world-class manufacturing company. In addition to
improving the way we execute in our factories, we are investing in
new technologies like additive manufacturing. We have created a
shared technology center for additive manufacturing and are already
developing new components that have better performance, reduced
weight and lower costs. In other words, we’re helping our customers
solve some of their most important problems.
• We will expand margins by accelerating our operational
excellence initiatives, implementing multi-year productivity plans,
focusing on growing outperforming businesses, and improving or
divesting underperformers.
In closing
• We will continue our disciplined approach to capital allocation
by investing to win in all of our businesses, consistently returning
cash to shareholders and pursuing strategic acquisitions.
A few years ago, we introduced a new vision for our company – to
improve the quality of life and the environment through our power
management products and services. This vision felt right then and
it feels even better today as we see the difference we are making
On growth, we are very excited about the significant role we can
in the world.
play in creating a better tomorrow by innovating and investing
in Intelligent Power solutions. And, we can already see how our
products are making a difference in the world.
• In cities across the globe, our intelligent lighting solutions are
helping customers better manage resources, gather important
data, enhance security and save energy.
• Our sensors are helping customers upgrade equipment
performance – improving hydraulic stability and
maximizing efficiency.
• We are transforming the way the world uses traditional and
renewable energy generation sources with our microgrid energy
systems, and we’re making power grids more resilient and efficient
so they can operate under challenging conditions.
• We’re helping truck drivers and fleet owners keep their fleets
on the road by enhancing remote diagnostics and real-time
performance monitoring.
• And, we’re changing the way homeowners manage power with our
smart circuit breakers by providing insights and analytics to keep
systems running at top efficiency.
On behalf of Eaton employees and partners, and those around
the world who benefit from your confidence in us, thank you.
Our strategy is working. Our commitments are real.
Our future is promising.
Sincerely,
Craig Arnold, chairman and chief executive officer
EATON 2017 Annual Report 5
We're helping to solve
the world’s most pressing
energy management and
climate change problems
Our technologies help utilities, municipalities, businesses and
homeowners reduce the impact they have on the environment.
Whether it’s using more energy-efficient products or harnessing
low carbon and renewable resources, we’re helping major
industries lower emissions and use less fuel.
We’re building the new xStorage energy storage
system at the Amsterdam ArenA stadium in
partnership with Nissan. When complete, it will be
one of Europe’s largest energy storage systems
used in a commercial building.
Going beyond compliance
to reduce our environmental
footprint
We believe that we owe it to future generations to leave the world
a little "greener." As a result, we are taking steps to reduce our
impact on the environment.
This past year, 28 of our facilities became zero
waste-to-landfill, bringing our total number to 118.
This means 40 percent of our manufacturing sites
do not send waste to landfills.
Unleashing the innovative power
of our 96,000 global employees
Our innovative engineers develop solutions that help our
customers reduce energy consumption and greenhouse gas
emissions. And it’s not just our engineers — all our employees
make a difference.
Our goal is to be active stewards of the environment.
Our employees’ efforts helped reduce water and
energy use and further our zero waste-to-landfill
goals. For World Environment Day, they planted 3,000
trees, removed more than a half ton of unsightly—and
hazardous to wildlife—trash along roads and highways;
and completed multiple projects around the world aimed
at reducing our environmental footprint.
Engaging with environmental
organizations and being
transparent about our
sustainability journey
We believe in the power of a collaborative approach, sharing our
experience with the rest of the world and leveraging relationships
with international organizations, governments and other
businesses. Together, we can drive measurable improvement in
what matters now and in the future.
As an associate partner of the Smart Cities Council,
we’re helping cities tap into the transformative power
of smart technology. Our connected, interactive
lighting solutions can help communities be safer
and more efficient.
“Our commitment to help customers work more safely, use less
energy, reduce greenhouse gas emissions and do business more
sustainably is embedded in who we are. Working together, we will
make a better world for our employees, our customers
and future generations.”
– Craig Arnold, chairman and chief executive officer
6 EATON 2017 Annual Report
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2017
Commission file number 000-54863
EATON CORPORATION plc
(Exact name of registrant as specified in its charter)
Ireland
(State or other jurisdiction of incorporation or organization)
98-1059235
(IRS Employer Identification Number)
Eaton House, 30 Pembroke Road, Dublin 4, Ireland
(Address of principal executive offices)
D04 Y0C2
(Zip code)
+353 1637 2900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Ordinary Shares ($0.01 par value)
Name of each exchange on which registered
The New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is
not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller
reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Smaller reporting company o
Accelerated filer o
Emerging growth company o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
The aggregate market value of Ordinary Shares held by non-affiliates of the registrant as of June 30, 2017 was $34.6 billion.
As of January 31, 2018, there were 440.2 million Ordinary Shares outstanding.
Portions of the Proxy Statement for the 2018 annual shareholders meeting are incorporated by reference into Part III.
Documents Incorporated By Reference
Part I
TABLE OF CONTENTS
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Business .................................................................................................................................................................................................
Risk Factors ...........................................................................................................................................................................................
Unresolved Staff Comments ..................................................................................................................................................................
Properties ...............................................................................................................................................................................................
Legal Proceedings..................................................................................................................................................................................
Mine Safety Disclosures ........................................................................................................................................................................
Part II
Item 5.
Market for the Registrant's Ordinary Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities...............................................................................................................................................................
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Selected Financial Data..........................................................................................................................................................................
Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................
Quantitative and Qualitative Disclosures about Market Risk................................................................................................................
Financial Statements and Supplementary Data......................................................................................................................................
Change in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................
Controls and Procedures ........................................................................................................................................................................
Other Information ..................................................................................................................................................................................
Part III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance.....................................................................................................................
Executive Compensation .......................................................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .............................................
Certain Relationships and Related Transactions, and Director Independence ......................................................................................
Principal Accounting Fees and Services ................................................................................................................................................
Part IV
Item 15.
Exhibits, Financial Statement Schedules ...............................................................................................................................................
Form 10-K Summary .............................................................................................................................................................................
SIGNATURES ....................................................................................................................................................................................................................
Item 16.
2
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3
5
5
5
5
6
6
6
6
7
7
7
7
7
8
8
9
9
9
10
10
10
14
15
Part I
Item 1. Business.
Eaton Corporation plc (Eaton or the Company) is a power management company with 2017 net sales of $20.4 billion. The
Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical
power more efficiently, safely and sustainably. Eaton has approximately 96,000 employees in 59 countries and sells products to
customers in more than 175 countries.
Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy and information statements, as well as any
amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the
Company's website at www.eaton.com. These filings are also accessible on the SEC's website at www.sec.gov.
Business Segment Information
Information by business segment and geographic region regarding principal products, principal markets, methods of
distribution, net sales, operating profit and assets is presented in Note 15 of the Notes to the Consolidated Financial Statements.
Additional information regarding Eaton's segments and business is presented below.
Electrical Products and Electrical Systems and Services
Principal methods of competition in these segments are performance of products and systems, technology, customer service
and support, and price. Eaton has a strong competitive position in these segments and, with respect to many products, is
considered among the market leaders. In normal economic cycles, sales of these segments are historically lower in the first
quarter and higher in the third and fourth quarters of a year. In 2017, 21% of these segments' sales were made to six large
distributors of electrical products and electrical systems and services.
Hydraulics
Principal methods of competition in this segment are product performance, geographic coverage, service, and price. Eaton
has a strong competitive position in this segment and, with respect to many products, is considered among the market leaders.
Sales of this segment are historically higher in the first and second quarters and lower in the third and fourth quarters of the
year. In 2017, 9% of this segment's sales were made to three large original equipment manufacturers or distributors of
agricultural, construction, and industrial equipment and parts.
Aerospace
Principal methods of competition in this segment are total cost of ownership, product and system performance, quality,
design engineering capabilities, and timely delivery. Eaton has a strong competitive position in this segment and, with respect
to many products and platforms, is considered among the market leaders. In 2017, 29% of this segment's sales were made to
three large original equipment manufacturers of aircraft.
Vehicle
Principal methods of competition in this segment are product performance, technology, global service, and price. Eaton has
a strong competitive position in this segment and, with respect to many products, is considered among the market leaders. In
2017, 69% of this segment's sales were made to nine large original equipment manufacturers of vehicles and related
components.
Information Concerning Eaton's Business in General
Raw Materials
Eaton's major requirements for raw materials include iron, steel, copper, nickel, aluminum, brass, tin, silver, lead, titanium,
rubber, plastic, electronic components, chemicals and fluids. Materials are purchased in various forms, such as extrusions,
castings, powder metal, metal sheets and strips, forging billets, bar stock, and plastic pellets. Raw materials, as well as parts and
other components, are purchased from many suppliers. Under normal circumstances, the Company has no difficulty obtaining
its raw materials. In 2017, Eaton maintained appropriate levels of inventory to prevent shortages and did not experience any
availability constraints.
2
Patents and Trademarks
Eaton considers its intellectual property, including without limitation patents, trade names, domain names, trademarks,
confidential information, and trade secrets to be of significant value to its business as a whole. The Company's products are
manufactured, marketed and sold under a portfolio of patents, trademarks, licenses, and other forms of intellectual property,
some of which expire or are allowed to lapse at various dates in the future. Eaton develops and acquires new intellectual
property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of the
Company's product lines, management believes that the loss or expiration of any single intellectual property right would not
have a material effect on Eaton's consolidated financial statements or its business segments. The Company's policy is to file
applications and obtain patents for the majority of its novel and innovative new products including product modifications and
improvements.
Order Backlog
A significant portion of open orders placed with Eaton are by original equipment manufacturers or distributors. These open
orders are not considered firm as they have been historically subject to releases by customers. In measuring backlog orders,
only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at
December 31, 2017 and 2016 was approximately $4.8 billion and $4.0 billion, respectively. Backlog should not be relied upon
as being indicative of results of operations for future periods.
Research and Development
Research and development expenses for new products and improvement of existing products in 2017, 2016 and 2015 were
$584 million, $589 million, and $625 million, respectively. Over the past five years, the Company has invested approximately
$3.1 billion in research and development.
Environmental Contingencies
Operations of the Company involve the use and disposal of certain substances regulated under environmental protection
laws. Eaton continues to modify processes on an ongoing, regular basis in order to reduce the impact on the environment,
including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with
laws that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the
protection of the environment, are not expected to have a material adverse effect upon earnings or the competitive position of
the Company. Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for
2018 and 2019. Information regarding the Company's liabilities related to environmental matters is presented in Note 8 of the
Notes to the Consolidated Financial Statements.
Item 1A. Risk Factors.
Among the risks that could materially adversely affect Eaton's businesses, financial condition or results of operations are the
following:
Volatility of end markets that Eaton serves.
Eaton's segment revenues, operating results, and profitability have varied in the past and may vary from quarter to quarter in
the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has
undertaken measures to reduce the impact of this volatility through diversification of the markets it serves and expansion of the
geographic regions in which it operates. Future downturns in any of the markets could adversely affect revenues, operating
results, and profitability.
Eaton's operating results depend in part on continued successful research, development, and marketing of new and/or
improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new
products and services.
The success of new and improved products and services depends on their initial and continued acceptance by Eaton's
customers. The Company's businesses are affected, to varying degrees, by technological change and corresponding shifts in
customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience
difficulties or delays in the research, development, production, or marketing of new products and services which may prevent
Eaton from recouping or realizing a return on the investments required to bring new products and services to market.
3
Eaton's ability to attract, develop and retain executives and other qualified employees is crucial to the Company's results of
operations and future growth.
Eaton depends on the continued services and performance of key executives, senior management, and skilled personnel,
particularly professionals with experience in its industry and business. Eaton cannot be certain that any of these individuals will
continue his or her employment with the Company. A lengthy period of time is required to hire and develop replacement
personnel when skilled personnel depart. An inability to hire, develop, and retain a sufficient number of qualified employees
could materially hinder the business by, for example, delaying Eaton's ability to bring new products to market or impairing the
success of the Company's operations.
Eaton's operations depend on production facilities throughout the world, which subjects them to varying degrees of risk of
disrupted production.
Eaton manages businesses with manufacturing facilities worldwide. The Company's manufacturing facilities and operations
could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity, economic upheaval, or public health
concerns. Some of these conditions are more likely in certain geographic regions in which Eaton operates. Any such disruption
could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately
compensate for losses.
If Eaton is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-
based attacks or network security breaches, operations could be disrupted or data confidentiality lost.
Eaton relies on information technology networks and systems, including the Internet, to process, transmit and store
electronic information, and to manage or support a variety of business processes and activities, including procurement,
manufacturing, distribution, invoicing and collection. These technology networks and systems may be susceptible to damage,
disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components;
power outages; hardware failures; or computer viruses. In addition, security breaches could result in unauthorized disclosure of
confidential information. If these information technology systems suffer severe damage, disruption, breach, or shutdown, and
business continuity plans do not effectively resolve the issues in a timely manner, there could be a negative impact on operating
results or the Company may suffer financial or reputational damage. Further, Cyber-based risks could also include attacks
targeting the security, integrity and/or reliability of the hardware, software and information installed, stored or transmitted in
our products, including after the purchase of those products and when they are incorporated into third party products, facilities
or infrastructure. Such attacks could result in disruptions to third party systems, unauthorized release of confidential or
otherwise protected information and corruption of data (our own or that of third parties). Further, to a significant extent, the
security of our customers’ systems depends on how those systems are protected, configured, updated and monitored, all of
which are typically outside our control.
Eaton's global operations subject it to economic risk as Eaton's results of operations may be adversely affected by changes
in government legislation, regulations and policies and currency fluctuations.
Operating globally subjects Eaton to changes in government regulations and policies in a large number of jurisdictions
around the world, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, and
exchange controls. Changes in the relative values of currencies occur from time to time and could affect Eaton's operating
results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging
activities, these risks could adversely affect operating results.
Further, existing free trade laws and regulations, such as the North American Free Trade Agreement, provide certain
beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and
other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade
restrictions, tariffs or taxes on imports from countries where we manufacture products could have an impact on our business
and financial results.
Eaton may be subject to risks relating to changes in its tax rates or exposure to additional income tax liabilities.
Eaton is subject to income taxes in many jurisdictions around the world. Income tax liabilities are subject to the allocation
of income among various tax jurisdictions. The Company's effective tax rate could be affected by changes in the mix among
earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, or changes in
tax laws. The amount of income taxes paid is subject to ongoing audits by tax authorities in the countries in which Eaton
operates. If these audits result in assessments different from amounts reserved, future financial results may include unfavorable
adjustments to the Company's tax liabilities.
4
Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases, or
supplier insolvencies could increase operating costs and adversely impact the competitive positions of Eaton's products.
Eaton's major requirements for raw materials are described above in Item 1 “Raw Materials”. Significant shortages could
affect the prices Eaton's businesses are charged and the competitive position of their products and services, all of which could
adversely affect operating results.
Further, Eaton's suppliers of component parts may increase their prices in response to increases in costs of raw materials
that they use to manufacture component parts. The Company may not be able to increase its prices commensurately with its
increased costs, adversely affecting operating results.
Eaton may be unable to adequately protect its intellectual property rights, which could affect the Company's ability to
compete.
Protecting Eaton's intellectual property rights is critical to its ability to compete and succeed. The Company owns a large
number of patents and patent applications worldwide, as well as trademark and copyright registrations that are necessary, and
contribute significantly, to the preservation of Eaton's competitive position in various markets. Although management believes
that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations
or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and
other intellectual property will not be challenged, invalidated, or circumvented by third parties. Eaton enters into confidentiality
and invention assignment agreements with the Company's employees, and into non-disclosure agreements with suppliers and
appropriate customers, so as to limit access to and disclosure of proprietary information. These measures may not suffice to
deter misappropriation or independent third party development of similar technologies.
Eaton is subject to litigation and environmental regulations that could adversely impact Eaton's businesses.
At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the
Company's businesses, financial condition or results of operations. Information regarding current legal proceedings is presented
in Note 8 and Note 9 of the Notes to the Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Eaton's principal executive offices are located at Eaton House, 30 Pembroke Road, Dublin 4, Ireland D04 Y0C2. The
Company maintains manufacturing facilities at approximately 327 locations in 42 countries. The Company is a lessee under a
number of operating leases for certain real properties and equipment, none of which is material to its operations. Management
believes that the existing manufacturing facilities are adequate for its operations and that the facilities are maintained in good
condition.
Item 3. Legal Proceedings.
Information regarding the Company's current legal proceedings is presented in Note 8 and Note 9 of the Notes to the
Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.
Executive Officers of the Registrant
Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report.
5
Part II
Item 5. Market for the Registrant's Ordinary Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
The Company's ordinary shares are listed for trading on the New York Stock Exchange. At December 31, 2017, there were
13,089 holders of record of the Company's ordinary shares. Additionally, 20,138 current and former employees were
shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton
Puerto Rico Retirement Savings Plan.
Information regarding cash dividends paid, and the high and low market price per ordinary share, for each quarter in 2017
and 2016 is presented in “Quarterly Data” of this Form 10-K. Information regarding equity-based compensation plans required
by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report.
Irish Taxes Applicable to Dividends
Irish income tax may arise with respect to dividends paid on Eaton shares. Generally, shareholders who are not tax residents
of Ireland and otherwise have no connection with Ireland other than his or her shareholding in Eaton, will not be subject to Irish
income tax. However, in certain circumstances, Eaton will be required to deduct Irish dividend withholding tax (“IDWT”,
currently at the rate of 20%) from dividends paid to its shareholders who are not Irish residents. In the majority of cases though,
shareholders resident in the U.S. and certain other countries are exempt from IDWT. To establish exempt status, shareholders
who qualify can complete certain Irish dividend withholding tax exemption forms or hold their shares in an account through the
Depository Trust Company and have on file with their broker or qualifying agent a valid U.S. address on the record date of the
dividend.
Eaton shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further
liability for Irish income tax on the dividends unless they are otherwise subject to Irish income tax.
Issuer's Purchases of Equity Securities
During the fourth quarter of 2017, 0.8 million ordinary shares were repurchased in the open market at a total cost of $61
million. These shares were repurchased under the program approved by the Board on February 24, 2016. A summary of the
shares repurchased in the fourth quarter of 2017 follows:
Total number of
shares purchased
Average price paid
per share
Total number of
shares purchased as
part of publicly
announced plans or
programs
Approximate dollar
value of shares that
may yet be
purchased under the
plans or programs
(in millions)
— $
$
— $
$
781,958
781,958
—
78.77
—
78.77
781,958
— $
$
— $
781,958
1,064
1,002
1,002
Month
October
November
December
Total
Item 6. Selected Financial Data.
Information regarding selected financial data is presented in the “Five-Year Consolidated Financial Summary” of this Form
10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Information required by this Item is presented in “Management's Discussion and Analysis of Financial Condition and
Results of Operations” of this Form 10-K.
6
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Information regarding market risk is presented in “Market Risk Disclosure” of this Form 10-K.
Item 8. Financial Statements and Supplementary Data.
The reports of the independent registered public accounting firm, consolidated financial statements, and notes to
consolidated financial statements are presented in Item 15 of this Form 10-K.
Information regarding selected quarterly financial information for 2017 and 2016 is presented in “Quarterly Data” of this
Form 10-K.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the
supervision and with the participation of Eaton's management, including Craig Arnold - Principal Executive Officer; and
Richard H. Fearon - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and
procedures were effective as of December 31, 2017.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the 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 Company reports filed under the
Exchange Act is accumulated and communicated to management, including the Company's Principal Executive Officer and
Principal Financial Officer, to allow timely decisions regarding required disclosure.
Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, Eaton
has included a report of management's assessment of the effectiveness of internal control over financial reporting, which is
included in Item 15 of this Form 10-K.
“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of
December 31, 2017 is included in Item 15 of this Form 10-K.
During the fourth quarter of 2017, there was no change in Eaton's internal control over financial reporting that materially
affected, or is reasonably likely to materially affect, internal control over financial reporting.
Item 9B. Other Information.
Disclosure Pursuant to Section 13(r) of the Exchange Act
Set forth below is a description of all matters reported by us pursuant to Section 219 of the Iran Threat Reduction and Syria
Human Rights Act of 2012 and Section 13(r) of the Exchange Act. Concurrently with the filing of this Annual Report, we are
filing a notice pursuant to Section 13(r) of the Exchange Act that such matters have been disclosed in this Annual Report.
During the fourth quarter, certain of our wholly-owned non-U.S. subsidiaries sold various electrical products to customers
in Iran. We received total revenue of approximately 1,220,762 Euros and realized net profits of approximately 399,894 Euros
from the sales (approximately $1,443,658 and $472,910 in whole U.S. dollars, respectively). One or more of our non-U.S.
subsidiaries intend to continue doing business in Iran under General License H in compliance with U.S. economic sanctions
and export control laws, though the Company has no assets or employees in Iran.
7
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in
the Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is incorporated by reference.
A listing of executive officers, their ages, positions and offices held over the past five years, as of February 1, 2018, follows:
Name
Craig Arnold
Age Position (Date elected to position)
57
Chairman of Eaton Corporation plc (June 1, 2016 - present)
Chief Executive Officer of Eaton Corporation (June 1, 2016 - present)
Director of Eaton Corporation plc (September 1, 2015 - present)
President and Chief Operating Officer of Eaton Corporation
(September 1, 2015 - May 31, 2016)
Vice Chairman and Chief Operating Officer - Industrial Sector of Eaton Corporation
(February 1, 2009 - August 31, 2015)
Richard H. Fearon
61 Director of Eaton Corporation plc (September 1, 2015 - present)
Vice Chairman and Chief Financial and Planning Officer of Eaton Corporation
(April 24, 2002 - present)
Revathi Advaithi
50
Chief Operating Officer - Electrical Sector of Eaton Corporation
(September 1, 2015 - present)
President of Electrical Sector, Americas of Eaton Corporation
(April 1, 2012 - August 31, 2015)
Uday Yadav
54
Chief Operating Officer - Industrial Sector of Eaton Corporation
(September 1, 2015 - present)
President of Aerospace Group of Eaton Corporation (August 1, 2012 - August 31,
2015)
Cynthia K. Brabander
56
Executive Vice President and Chief Human Resources Officer of Eaton Corporation
(March 1, 2012 - present)
Heath B. Monesmith
47
Executive Vice President and General Counsel of Eaton Corporation
(March 1, 2017 - present)
Senior Vice President and Deputy General Counsel of Eaton Corporation
(May 15, 2015 - March 1, 2017)
Vice President and Chief Counsel - Litigation of Eaton Corporation
(November 30, 2012 - May 15, 2015)
Thomas E. Moran
Ken D. Semelsberger
53
56
Senior Vice President and Secretary of Eaton Corporation plc (November 27, 2012 -
present)
Senior Vice President and Controller of Eaton Corporation (November 1, 2013 -
present)
Senior Vice President, Finance and Planning - Industrial Sector of Eaton Corporation
(February 1, 2009 - October 31, 2013)
Joao V. Faria
53
President - Vehicle Group of Eaton Corporation (May 1, 2017 - present)
Vice President and General Manager, Latin America, Electrical Sector and
President, Latin America (August 1, 2013 - April 30, 2017)
President, Americas, Hydraulics Group (July 1, 2010 - July 31, 2013)
8
Curtis J. Hutchins
52
President - Hydraulics Group of Eaton Corporation (August 1, 2015 - present)
President - Asia Pacific Region of Eaton Corporation (September 1, 2009 - July 31,
2015)
Nandakumar Cheruvatath
56
President - Aerospace Group of Eaton Corporation (September 1, 2015 - present)
Executive Vice President, Eaton Business System (August 1, 2012 - August 31, 2015)
Richard M. Eubanks, Jr.
(Mark)
45
President - Electrical Products Group of Eaton Corporation (September 1, 2015 -
present)
President, Eaton Lighting Division (February 1, 2010 - August 31, 2015)
William J. VanLandingham II
55
President - Electrical Systems and Services Group of Eaton Corporation
(September 1, 2015 - present)
President, Crouse-Hinds Business, Electrical Sector ( December 1, 2012 - August 31,
2015)
There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to
which any of them were elected as officers. All officers hold office for one year and until their successors are elected and
qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with
or without cause, at any time, by a vote of a majority of the Board of Directors.
Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption
“Section 16(a) Beneficial Ownership Reporting” in the Company's definitive Proxy Statement to be filed on or about March 16,
2018, and is incorporated by reference.
The Company has adopted a Code of Ethics, which applies to the directors, officers and employees worldwide. This
document is available on the Company's website at http://www.eaton.com.
There were no changes during the fourth quarter 2017 to the procedures by which security holders may recommend
nominees to the Company's Board of Directors.
Information related to the Audit Committee, and members of the Committee who are financial experts, is set forth under the
caption “Board Committees - Audit Committee” in the definitive Proxy Statement to be filed on or about March 16, 2018, and
is incorporated by reference.
Item 11. Executive Compensation.
Information required with respect to executive compensation is set forth under the caption “Compensation Discussion and
Analysis” in the Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required with respect to securities authorized for issuance under equity-based compensation plans is set forth
under the caption “Equity Compensation Plans” in the Company's definitive Proxy Statement to be filed on or about March 16,
2018, and is incorporated by reference.
Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share
Ownership Tables” in the Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is incorporated by
reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required with respect to certain relationships and related transactions is set forth under the caption “Review of
Related Person Transactions” in the Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is
incorporated by reference.
9
Information required with respect to director independence is set forth under the caption “Director Independence” in the
Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is incorporated by reference.
Item 14. Principal Accounting Fees and Services.
Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee
Report” in the Company's definitive Proxy Statement to be filed on or about March 16, 2018, and is incorporated by reference.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
(a)
(1) The reports of the independent registered public accounting firm, consolidated financial statements and notes to
consolidated financial statements are included in Item 8 above:
Reports of Independent Registered Public Accounting Firm
Consolidated Statements of Income - Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income - Years ended December 31, 2017, 2016 and 2015
Consolidated Balance Sheets - December 31, 2017 and 2016
Consolidated Statements of Cash Flows - Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related
instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits incorporated by reference to or filed in conjunction with this form 10-K are listed below.
3 (i)
3 (ii)
4.1
4.2
4.3
4.4
4.5
4.6
4.7
Certificate of Incorporation - Incorporated by reference to the Form S-8 filed November 30, 2012
Amended and restated Memorandum and Articles of Incorporation - Incorporated by reference to the Form 8-
K Report filed on May 1, 2017
Indenture dated as of November 20, 2012, among Turlock Corporation, the guarantors named therein and The
Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Eaton
Corporation plc's Form 8-K Current Report filed on November 26, 2012 (Commission File No. 333-182303))
Supplemental Indenture No. 1, dated as of November 30, 2012, among Eaton Corporation, the guarantors
named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference
to Exhibit 4.2 of the registrant's Form S-4 filed on September 6, 2013)
Supplemental Indenture No. 2, dated as of January 8, 2013, among Eaton Corporation, the guarantors named
therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference Exhibit
4.3 of the registrant's Form S-4 filed on September 6, 2013)
Supplemental Indenture No. 3, dated as of December 20, 2013, among Eaton Corporation, the guarantors
named therein and The Bank of New York Mellon Trust Company, N.A., as trustee - Filed in conjunction with
this Form 10-K Report *
Supplemental Indenture No. 4, dated as of December 20, 2017 and effective as of January 1, 2018, among
Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as
trustee - Filed in conjunction with this Form 10-K Report *
Supplemental Indenture No. 5, dated as of February 16, 2018, among Eaton Corporation, the guarantors
named therein and The Bank of New York Mellon Trust Company, N.A., as trustee - Filed in conjunction with
this Form 10-K Report *
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 long-term debt other than those set forth in Exhibits (4.1 - 4.6)
hereto
10
10
Material contracts
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Senior Executive Incentive Compensation Plan (effective February 27, 2013) - Incorporated by
reference to the Form 10-K Report for the year ended December 31, 2012
Deferred Incentive Compensation Plan II - Incorporated by reference to the Form 10-K Report for
the year ended December 31, 2007
First Amendment to Deferred Incentive Compensation Plan II - Incorporated by reference to the
Form S-8 filed November 30, 2012
Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K Report
for the year ended December 31, 2007
First Amendment to Excess Benefits Plan II (2008 restatement) - Incorporated by reference to the
Form 10-K Report for the year ended December 31, 2012
Incentive Compensation Deferral Plan II - Incorporated by reference to the Form 10-K Report for
the year ended December 31, 2007
First Amendment to Incentive Compensation Deferral Plan II - Incorporated by reference to the
Form S-8 filed November 30, 2012
Limited Eaton Service Supplemental Retirement Income Plan II - Incorporated by reference to the
Form 10-K Report for the year ended December 31, 2007
First Amendment to Limited Eaton Service Supplemental Retirement Income Plan II -
Incorporated by reference to the Form 10-K Report for the year ended December 31, 2012
Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2007
First Amendment to Supplemental Benefits Plan II (2008 restatement) - Incorporated by reference
to the Form 10-K Report for the year ended December 31, 2012
Form of Restricted Share Unit Agreement - Incorporated by reference to the Form 10-K Report for
the year ended December 31, 2015
(m)
Form of Restricted Share Award Agreement - Incorporated by reference to the Form 10-K Report
for the year ended December 31, 2015
(n)
(o)
(p)
(q)
(r)
(s)
(t)
(u)
(v)
Form of Restricted Share Agreement (Non-Employee Directors) - Incorporated by reference to the
Form 8-K Report filed February 1, 2010
Form of Directors' Restricted Share Unit Agreement - Incorporated by reference to the Form 10-K
report for the year ended December 31, 2012
Form of Stock Option Agreement for Executives - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2015
Form of Stock Option Agreement for Non-Employee Directors (2008) - Incorporated by reference
to the Form 10-K Report for the year ended December 31, 2007
Amended and Restated 2002 Stock Plan - Incorporated by reference to the Form S-8 filed
November 30, 2012
Amended and Restated 2004 Stock Plan - Incorporated by reference to the Form S-8 filed
November 30, 2012
Amended and Restated 2008 Stock Plan - Incorporated by reference to the Form S-8 filed
November 30, 2012
Second Amended and Restated 2009 Stock Plan - Incorporated by reference to Form S-8 filed
November 30, 2012
Amended and Restated 2012 Stock Plan - Incorporated by reference to the Form S-8 filed
November 30, 2012
(w)
Amendment to Amended and Restated 2012 Stock Plan - Incorporated by reference to the Form
10-K Report for the year ended December 31, 2012
11
(x)
(y)
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)
(gg)
(hh)
(ii)
(jj)
(kk)
(ll)
First Amendment to 2005 Non-Employee Director Fee Deferral Plan - Incorporated by reference to
the Form S-8 filed November 30, 2012
2013 Non-Employee Director Fee Deferral Plan - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2012
2015 Stock Plan - Incorporated by reference to the Form S-8 filed on October 30, 2015
Form of Change of Control Agreement entered into with officers of Eaton Corporation -
Incorporated by reference to the Form 8-K Report filed on December 17, 2015
Form of Indemnification Agreement entered into with directors - Incorporated by reference to the
Form 10-K Report for the year ended December 31, 2012
Form of Indemnification Agreement II entered into with directors - Incorporated by reference to
the Form 10-K Report for the year ended December 31, 2012
Amended and Restated Executive Strategic Incentive Plan (amended and restated February 27,
2013) - Incorporated by reference to the Form 10-K Report for the year ended December 31, 2012
Executive Strategic Incentive Plan II (effective January 1, 2001) - Incorporated by reference to the
Form 10-K Report for the year ended December 31, 2002
Amended and Restated Supplemental Executive Strategic Incentive Plan (amended and restated
February 27, 2013) - Incorporated by reference to the Form 10-K Report for the year ended
December 31, 2012
Deferred Incentive Compensation Plan (amended and restated effective November 1, 2007) -
Incorporated by reference to the Form 10-K Report for the year ended December 31, 2009
Excess Benefits Plan (amended and restated effective January 1, 1989) - Incorporated by reference
to the Form 10-K Report for the year ended December 31, 2002
Amendment to Excess Benefits Plan I - Incorporated by reference to the Form 10-K Report for the
year ended December 31, 2012
Supplemental Benefits Plan (amended and restated January 1, 1989) - Incorporated by reference to
the Form 10-K Report for the year ended December 31, 2002
Amendment to Supplemental Benefits Plan I - Incorporated by reference to the Form 10-K Report
for the year ended December 31, 2012
Eaton Corporation Board of Directors Policy on Incentive Compensation, Stock Options and Other
Equity Grants upon the Restatement of Financial Results - Incorporated by reference to the Form
10-K Report for the year ended December 31, 2015
(mm)
Amended and Restated Grantor Trust Agreement for Non-Employee Directors’ Deferred Fees
Plans - effective January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year
ended December 31, 2010
(nn)
(oo)
(pp)
(qq)
(rr)
(ss)
(tt)
Amended and Restated Grantor Trust Agreement for Employees’ Deferred Compensation Plans -
effective January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year ended
December 31, 2010
Eaton Savings Plan 2016 Restatement - Incorporated by reference to the Form 10-K Report for the
year ended December 31, 2015
Eaton Personal Investment Plan 2015 Restatement - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2015
Performance Share Award Agreement - Incorporated by reference to the Form 10-K Report for the
year ended December 31, 2015
Form of Indemnification Agreement entered into with officers of Eaton Corporation - Incorporated
by reference to the Form 10-K Report for the year ended December 31, 2015
Amendment to Limited Eaton Service Supplemental Retirement Income Plan I- Incorporated by
reference to the Form 10-K Report for the year ended December 31, 2015
First Amendment to Eaton Savings Plan - Incorporated by reference to the Form 10-K Report for
the year ended December 31, 2016
12
(uu)
(vv)
(ww)
(xx)
(yy)
(zz)
(aaa)
(bbb)
(ccc)
(ddd)
(eee)
Second Amendment to Eaton Savings Plan - Incorporated by reference to the Form 10-K Report
for the year ended December 31, 2016
First Amendment to Eaton Personal Investment Plan - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2016
Second Amendment to Eaton Personal Investment Plan - Incorporated by reference to the Form 10-
K Report for the year ended December 31, 2016
Amendment to Eaton Corporation Excess Benefits Plan - Incorporated by reference to the Form
10-K Report for the year ended December 31, 2016
Amendment to Eaton Corporation Supplemental Benefits Plan - Incorporated by reference to the
Form 10-K Report for the year ended December 31, 2016
Second Amendment to Eaton Corporation Excess Benefits Plan II - Incorporated by reference to
the Form 10-K Report for the year ended December 31, 2016
Second Amendment to Limited Eaton Service Supplemental Retirement Income Plan II -
Incorporated by reference to the Form 10-K Report for the year ended December 31, 2016
Second Amendment to Eaton Corporation Supplemental Benefits Plan II - Incorporated by
reference to the Form 10-K Report for the year ended December 31, 2016
2016 RSU Grant Agreement - Incorporated by reference to the Form 10-K Report for the year
ended December 31, 2016
2016 Performance Share Grant Agreement - Incorporated by reference to the Form 10-K Report
for the year ended December 31, 2016
Special 2016 Performance Share Grant Agreement - Incorporated by reference to the Form 10-K
Report for the year ended December 31, 2016
Ratio of Earnings to Fixed Charges - Filed in conjunction with this Form 10-K Report *
Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14,
2008
Change in Accounting Principles - Filed in conjunction with this Form 10-K Report *
Subsidiaries of Eaton Corporation plc - Filed in conjunction with this Form 10-K Report *
Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form
10-K Report *
Power of Attorney - Filed in conjunction with this Form 10-K Report *
Certification of Principal Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section
302) - Filed in conjunction with this Form 10-K Report *
Certification of Principal Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section
302) - Filed in conjunction with this Form 10-K Report *
Certification of Principal Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002,
Section 906) - Filed in conjunction with this Form 10-K Report *
Certification of Principal Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002,
Section 906) - Filed in conjunction with this Form 10-K Report *
XBRL Instance Document *
XBRL Taxonomy Extension Schema Document *
XBRL Taxonomy Extension Calculation Linkbase Document *
XBRL Taxonomy Extension Definition Linkbase Document *
XBRL Taxonomy Extension Label Linkbase Document *
XBRL Taxonomy Extension Presentation Linkbase Document *
12
14
18
21
23
24
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
_______________________________
13
*
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 years ended December 31, 2017, 2016 and 2015, (ii) Consolidated Statements of
Comprehensive Income for the years ended December 31, 2017, 2016 and 2015 (iii) Consolidated Balance Sheets at
December 31, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and
2015, (v) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2017, 2016 and 2015 and (vi)
Notes to Consolidated Financial Statements for the year ended December 31, 2017.
Item 16. Form 10-K Summary.
Not applicable.
14
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.
SIGNATURES
EATON CORPORATION plc
Registrant
Date: February 28, 2018
By:
/s/ Richard H. Fearon
Richard H. Fearon
(On behalf of the registrant and as Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the date indicated.
Date: February 28, 2018
Signature
Title
*
Craig Arnold
/s/ Ken D. Semelsberger
Ken D. Semelsberger
Chairman, Principal Executive
Officer; Director
/s/ Richard H. Fearon
Richard H. Fearon
*
Principal Financial Officer,
Director
Principal Accounting Officer
Todd M. Bluedorn
Director
*
Christopher M. Connor Director
*
Charles E. Golden
*
Deborah L. McCoy
*
Sandra Pianalto
*
Director
Director
Director
Dorothy C. Thompson
Director
*
Michael J. Critelli
Director
*
Arthur E. Johnson
Director
/s/ Gregory R. Page
Gregory R. Page
Director
*
Gerald B. Smith
Director
*By
/s/ Richard H. Fearon
Richard H. Fearon, Attorney-in-Fact for the officers
and directors signing in the capacities indicated
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Eaton Corporation plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Eaton Corporation plc (“the Company”) as of December 31,
2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows
for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013
framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Change in Accounting Principle
As discussed in Notes 1 and 14 to the consolidated financial statements, in 2017 the Company elected to change its method of
accounting for certain inventories in the United States to the first-in, first-out (“FIFO”) method, while in prior years, these inventories
were accounted for using the last-in, first-out (“LIFO”) method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1923.
Cleveland, Ohio
February 28, 2018
16
MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS
We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation plc
("Eaton") included herein for the three years ended December 31, 2017. The primary responsibility for the integrity of the
financial information included in this annual report rests with management. The financial information included in this annual
report has been prepared in accordance with accounting principles generally accepted in the United States based on our best
estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton's independent
registered public accounting firm, on those financial statements is included herein.
Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful
attention is given to selecting, training and developing personnel, to ensure that management's objectives of establishing and
maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures
provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company's
commitment to a high standard of business conduct.
The Board of Directors pursues its responsibility for the quality of Eaton's financial reporting primarily through its Audit
Committee, which is composed of five independent directors. The Audit Committee meets regularly with management, the
internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and
to discuss matters concerning accounting, control, audits and financial reporting. The internal auditors and independent
registered public accounting firm have full and free access to senior management and the Audit Committee.
/s/ Craig Arnold
Principal Executive Officer
/s/ Richard H. Fearon
Principal Financial Officer
/s/ Ken D. Semelsberger
Principal Accounting Officer
February 28, 2018
17
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Eaton Corporation plc
Opinion on Internal Control over Financial Reporting
We have audited Eaton Corporation plc’s (“the Company”) internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated
statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended
December 31, 2017 and the related notes and our report dated February 28, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing
such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for
our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Cleveland, Ohio
February 28, 2018
18
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Eaton Corporation plc ("Eaton") is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Exchange Act rules 13a-15(f)).
Under the supervision and with the participation of Eaton's management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial
reporting as of December 31, 2017. In conducting this evaluation, we used the framework set forth by the Committee of
Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 Framework). Based
on this evaluation under the framework referred to above, management concluded that the Company's internal control over
financial reporting was effective as of December 31, 2017.
The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the
Company's internal control over financial reporting as of December 31, 2017. This report is included herein.
/s/ Craig Arnold
Principal Executive Officer
/s/ Richard H. Fearon
Principal Financial Officer
/s/ Ken D. Semelsberger
Principal Accounting Officer
February 28, 2018
19
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
(In millions except for per share data)
Net sales
Cost of products sold
Selling and administrative expense
Research and development expense
Interest expense - net
Gain on sale of business
Other income - net
Income before income taxes
Income tax expense
Net income
Less net income for noncontrolling interests
Net income attributable to Eaton ordinary shareholders
Net income per share attributable to Eaton ordinary shareholders
Diluted
Basic
Weighted-average number of ordinary shares outstanding
Diluted
Basic
Year ended December 31
2017
2016*
2015*
$
20,404
$
19,747
$
20,855
13,756
3,565
13,409
3,505
14,304
3,596
584
246
1,077
(38)
3,368
382
2,986
(1)
2,985
6.68
6.71
$
$
589
233
—
(107)
2,118
199
1,919
(3)
1,916
4.20
4.21
$
$
625
232
—
(35)
2,133
159
1,974
(2)
1,972
4.22
4.23
$
$
447.0
444.5
456.5
455.0
467.1
465.5
Cash dividends declared per ordinary share
$
2.40
$
2.28
$
2.20
*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
20
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
Net income
Less net income for noncontrolling interests
Net income attributable to Eaton ordinary shareholders
Other comprehensive income (loss), net of tax
Currency translation and related hedging instruments
Pensions and other postretirement benefits
Cash flow hedges
Other comprehensive income (loss) attributable to Eaton
ordinary shareholders
Year ended December 31
2017
2016*
2015*
$
$
2,986
(1)
2,985
$
1,919
(3)
1,916
1,974
(2)
1,972
807
241
(4)
1,044
(570)
(6)
(9)
(585)
(1,078)
111
3
(964)
Total comprehensive income attributable to Eaton ordinary shareholders
$
4,029
$
1,331
$
1,008
*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
21
EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS
(In millions)
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Inventory
Prepaid expenses and other current assets
Total current assets
Property, plant and equipment
Land and buildings
Machinery and equipment
Gross property, plant and equipment
Accumulated depreciation
Net property, plant and equipment
Other noncurrent assets
Goodwill
Other intangible assets
Deferred income taxes
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities
Short-term debt
Current portion of long-term debt
Accounts payable
Accrued compensation
Other current liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Pension liabilities
Other postretirement benefits liabilities
Deferred income taxes
Other noncurrent liabilities
Total noncurrent liabilities
Shareholders’ equity
Ordinary shares (439.9 million outstanding in 2017 and 449.4 million in 2016)
Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Shares held in trust
Total Eaton shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
December 31
2017
2016*
$
$
$
$
$
$
561
534
3,943
2,620
679
8,337
2,491
6,014
8,505
(5,003)
3,502
13,568
5,265
253
1,698
32,623
6
578
2,166
453
1,872
5,075
7,167
1,226
362
538
965
10,258
4
11,987
8,669
(3,404)
(3)
17,253
37
17,290
$
32,623
$
543
203
3,560
2,346
381
7,033
2,369
5,670
8,039
(4,596)
3,443
13,201
5,514
325
960
30,476
14
1,552
1,718
379
1,822
5,485
6,711
1,659
368
321
934
9,993
5
11,845
7,555
(4,448)
(3)
14,954
44
14,998
30,476
*December 31, 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the
consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
22
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
Operating activities
Net income
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization
Deferred income taxes
Pension and other postretirement benefits expense
Contributions to pension plans
Contributions to other postretirement benefits plans
Gain on sale of businesses
Changes in working capital
Accounts receivable - net
Inventory
Accounts payable
Accrued compensation
Accrued income and other taxes
Other current assets
Other current liabilities
Other - net
Net cash provided by operating activities
Investing activities
Capital expenditures for property, plant and equipment
Proceeds from sale of business
Cash received from (paid for) acquisitions of businesses, net of cash acquired
Sales (purchases) of short-term investments - net
Other - net
Net cash used in investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Cash dividends paid
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares withheld
Other - net
Net cash used in financing activities
Effect of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
Year ended December 31
2017
2016*
2015*
$
2,986
$
1,919
$
1,974
914
(206)
208
(473)
(20)
(843)
(231)
(202)
388
59
(4)
2
(203)
291
2,666
(520)
607
—
(298)
(6)
(217)
1,000
(1,554)
(1,068)
66
(850)
(22)
(14)
929
(83)
235
(262)
(30)
—
(170)
34
—
20
30
(21)
(44)
13
2,570
(497)
—
1
(40)
7
(529)
631
(653)
(1,037)
74
(730)
(18)
(5)
925
(105)
323
(330)
(31)
—
5
(8)
(120)
(28)
(9)
7
(38)
(156)
2,409
(506)
1
(72)
37
(35)
(575)
425
(1,027)
(1,026)
52
(682)
(38)
(9)
(2,442)
(1,738)
(2,305)
11
18
543
561
$
(28)
275
268
543
$
(42)
(513)
781
268
$
*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
23
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In millions)
Shares
Dollars
Ordinary shares
Capital
in
excess
of par
value
Accumulated
other
comprehensive
loss
Retained
earnings*
Shares
held in
trust
Total Eaton
shareholders'
equity*
Noncontrolling
interests
Total
equity*
Balance at January 1, 2015 (originally
reported)
467.9
$
Inventory accounting method change*
Balance at January 1, 2015*
Net income*
Other comprehensive loss, net of tax
Cash dividends paid
Issuance of shares under equity-based
compensation plans - net (net of
income tax benefit of $1)
Changes in noncontrolling interest of
consolidated subsidiaries - net
Repurchase of shares
Balance at December 31, 2015*
Net income*
Other comprehensive loss, net of tax
Cash dividends paid
Issuance of shares under equity-based
compensation plans - net (net of
income tax benefit of $1)
Changes in noncontrolling interest of
consolidated subsidiaries - net
Repurchase of shares
Balance at December 31, 2016*
Cumulative-effect adjustment upon
adoption of ASU 2016-09
Net income
Other comprehensive income, net of
tax
Cash dividends paid
Issuance of shares under equity-based
compensation plans
Changes in noncontrolling interest of
consolidated subsidiaries - net
—
467.9
—
—
2.2
—
(11.3)
458.8
—
—
2.4
—
(11.8)
449.4
—
—
—
2.0
—
Repurchase of shares
(11.5)
5
—
5
—
—
—
—
—
5
—
—
—
—
—
5
—
—
—
—
—
(1)
$ 11,605
$
7,078
$
(2,899) $
(3) $
15,786
$
—
11,605
—
—
99
(3)
—
11,701
—
—
144
—
—
11,845
—
—
70
7,148
1,972
(1,026)
(3)
—
(682)
7,409
1,916
(1,037)
(3)
—
(730)
7,555
48
2,985
—
(1,068)
142
—
—
(2)
—
(849)
—
(2,899)
—
(964)
—
—
—
—
(3,863)
—
(585)
—
—
—
—
(4,448)
—
—
1,044
—
—
—
—
—
(3)
—
—
—
—
—
(3)
—
—
—
—
—
(3)
—
—
—
—
—
—
70
15,856
1,972
(964)
(1,026)
96
(3)
(682)
15,249
1,916
(585)
(1,037)
141
—
(730)
14,954
48
2,985
1,044
(1,068)
140
—
(850)
Balance at December 31, 2017
439.9
$
4
$ 11,987
$
8,669
$
(3,404) $
(3) $
17,253
$
53
—
53
2
—
$15,839
70
15,909
1,974
(964)
(9)
(1,035)
—
(1)
—
45
3
—
96
(4)
(682)
15,294
1,919
(585)
(2)
(1,039)
—
(2)
—
44
—
1
—
(5)
—
(3)
—
37
141
(2)
(730)
14,998
48
2,986
1,044
(1,073)
140
(3)
(850)
$17,290
*The balances at January 1, 2015 and the year ended December 31, 2015 and 2016 amounts have been adjusted to reflect the change in inventory accounting
method, as described in Notes 1 and 14 to the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
24
EATON CORPORATION plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Presentation
Eaton Corporation plc (Eaton or the Company) is a power management company with 2017 net sales of $20.4 billion. The
Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical
power more efficiently, safely and sustainably. Eaton has approximately 96,000 employees in 59 countries and sells products to
customers in more than 175 countries.
The consolidated financial statements of the Company have been prepared in accordance with generally accepted
accounting principles in the United States. Preparation of the consolidated financial statements requires management to make
estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could
differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial
statements were filed with the Securities Exchange Commission.
The consolidated financial statements include the accounts of Eaton and all subsidiaries and other entities it controls.
Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in
associate companies where the Company has significant influence and generally a 20% to 50% ownership interest. Equity
investments are evaluated for impairment whenever events or circumstances indicate the book value of the investment exceeds
fair value. An impairment would exist if there is an other-than-temporary decline in value. Eaton does not have off-balance
sheet arrangements or financings with unconsolidated entities. In the ordinary course of business, the Company leases certain
real properties and equipment, as described in Note 8.
Eaton's functional currency is United States Dollars (USD). The functional currency for most subsidiaries is their local
currency. Financial statements for these subsidiaries are translated at year-end exchange rates as to assets and liabilities and
weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in
Accumulated other comprehensive loss.
During 2017, the Company adopted Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic
718): Improvements to Employee Share-Based Payment Accounting, (ASU 2016-09). Upon adoption, the Company recorded
deferred tax assets of $48 for all excess tax benefits that had not been previously recognized. This was accomplished through a
cumulative-effect adjustment to retained earnings. ASU 2016-09 also requires that all excess tax benefits and deficiencies
generated in the current and future periods be recorded as income tax benefit or expense in the reporting period in which they
occur. These excess tax benefits and deficiencies, which were previously required to be presented as financing activities on the
Company’s Consolidated Statements of Cash Flows, are now classified as operating activities prospectively. The Company also
reclassified $22, $18, and $38 for 2017, 2016, and 2015, respectively, from operating activities to financing activities on the
Company’s Consolidated Statements of Cash Flows for withholding payments made to taxing authorities from shares withheld
from employees. The Company will continue to estimate forfeitures as part of recording equity-based compensation expense.
During the fourth quarter of 2017, the Company changed its method of accounting for certain inventory in the United States
from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. All prior periods presented have been
retrospectively adjusted to apply the new method of accounting. See Note 14 for more information on the change in inventory
accounting method.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers
and title has transferred in accordance with shipping terms, the selling price is fixed and determinable and collectability is
reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist.
Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold.
Although the majority of the sales agreements contain standard terms and conditions, there are agreements that contain multiple
elements or non-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting,
including whether the deliverables specified in these agreements should be treated as separate units of accounting for
recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for
each element. For delivered elements, sales generally are recognized only when the delivered elements have standalone value
and there are no uncertainties regarding customer acceptance. Sales for service contracts generally are recognized as the
services are provided.
25
Eaton records reductions to revenue for customer and distributor incentives, primarily comprised of rebates, at the time of
the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market
conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels.
Goodwill and Indefinite Life Intangible Assets
Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Goodwill is
tested for impairment at the reporting unit level, which is equivalent to Eaton's operating segments and based on the net assets
for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment, as this represents
the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The
Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to
perform a qualitative analysis. Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances
change that would indicate that it is more likely than not that the fair value of an operating segment is less than its carrying
amount.
Goodwill impairment testing in 2017 was performed using qualitative analysis, which is performed by assessing certain
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 are compared to, and
based on, the assumptions used in the most recent quantitative assessment performed in 2016. The results of the qualitative
analysis did not indicate a need to perform a quantitative analysis.
Goodwill impairment testing for 2016 was performed using a quantitative analysis under which the fair value for each
reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an
estimated weighted-average cost of capital. The forecasted cash flows were based on the Company's long-term operating plan
and a terminal value was used to estimate the operating segment's cash flows beyond the period covered by the operating plan.
The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market
holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about
appropriate discount rates, perpetual growth rates and the timing of expected future cash flows of the respective reporting unit.
Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the
resulting estimated fair values.
Based on a qualitative analysis performed in 2017 and a quantitative analysis performed in 2016, the fair value of Eaton's
reporting units continue to substantially exceed their respective carrying amounts.
Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using
either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts.
Indefinite life intangible asset impairment testing for 2017 and 2016 was performed using a quantitative analysis. The
Company determines the fair value of these assets using a royalty relief methodology similar to that employed when the
associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. Additionally,
indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would
indicate that it is more likely than not that the asset is impaired. For 2017 and 2016, the fair value of indefinite lived intangible
assets exceeded the respective carrying value.
For additional information about goodwill and other intangible assets, see Note 5.
Other Long-Lived Assets
Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally
computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research
and development expense, as appropriate. Cost of buildings are depreciated generally over 40 years and machinery and
equipment over 3 to 10 years. At December 31, 2017, the weighted-average amortization period for intangible assets subject to
amortization was 17 years for patents and technology, primarily as a result of the long life of aircraft platforms; 17 years for
customer relationships; and 17 years for certain trademarks. Software is generally amortized up to a life of 15 years.
Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which
identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be
considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its
carrying value. Determining asset groups and underlying cash flows requires the use of significant judgment.
26
Retirement Benefits Plans
For the principal pension plans in the United States, Canada, Puerto Rico and the United Kingdom, the Company uses a
market-related value of plan assets to calculate the expected return on assets used to determine net periodic benefit costs. The
market-related value of plan assets is a calculated value that recognizes changes in the fair value of plan assets over a five year
period. All other plans use fair value of plan assets.
Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor.
The Company’s corridors are set at either 8% or 10%, depending on the plan, of the greater of the plan assets or benefit
obligations. Gains or losses outside of the corridor are subject to amortization over an average employee future service period
that differs by plan, but is approximately 12 years on a weighted average basis. If most or all of the plan’s participants are no
longer actively accruing benefits, the average life expectancy is used.
Warranty Accruals
Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products
sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts.
Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and
other events when they are known and estimable. See Note 8 for additional information about warranty accruals.
Asset Retirement Obligations
A conditional asset retirement obligation is recognized at fair value when incurred if the fair value of the liability can be
reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would
be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of
its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company
may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized when sufficient
information is available to estimate fair value.
Income Taxes
Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax
basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to
reverse. Deferred income tax assets are recognized for income tax loss carryforwards and income tax credit carryforwards.
Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax
assets. Eaton recognizes the income tax benefit from an uncertain tax position only if it is more likely than not that the tax
position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates
and adjusts these accruals based on changing facts and circumstances. Eaton recognizes interest and penalties related to
unrecognized income tax benefits in the provision for income tax expense. Penalties on unrecognized income tax benefits have
been accrued for jurisdictions where penalties are automatically applied to any deficiency, regardless of the merit of the
position. For additional information about income taxes, see Note 9.
Equity-Based Compensation
Eaton recognizes equity-based compensation expense based on the grant date fair value of the award. Awards with service
conditions or both service and market conditions are expensed over the period during which an employee is required to provide
service in exchange for the award. Awards with both service and performance conditions are expensed over the period an
employee is required to provide service based on the number of units for which achievement of the performance objective is
probable. Participants awarded restricted stock units (RSUs) in 2015 and 2016, do not receive dividends; therefore, their fair
value is determined by reducing the closing market price of the Company’s ordinary shares on the date of grant by the present
value of the estimated dividends had they been paid. The fair value of RSUs awarded in 2017, restricted stock awards (RSAs)
and performance stock units (PSUs) with performance conditions are determined based on the closing market price of the
Company’s ordinary shares at the date of grant. The Company uses a Monte Carlo simulation to estimate the fair value of PSUs
with market conditions, which incorporates assumptions regarding expected stock price volatility and the risk-free interest rate.
Stock options are granted with an exercise price equal to the closing market price of Eaton ordinary shares on the date of grant.
The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions
regarding the expected stock price volatility, the expected option life, the risk-free interest rate, and the expected dividend yield.
See Note 11 for additional information about equity-based compensation.
27
Derivative Financial Instruments and Hedging Activities
Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, currency, and
interest rates on certain debt. These instruments are marked to fair value in the accompanying Consolidated Balance Sheets.
Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of
hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge
accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value
hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for
hedge accounting are recognized immediately in net income. See Note 13 for additional information about hedges and
derivative financial instruments.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue
from Contracts with Customers (ASU 2014-09). This accounting standard supersedes all existing US GAAP revenue
recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers the control of promised goods
or services to customers in an amount that reflects the consideration which the company expects to collect in exchange for
those goods or services. ASU 2014-09 will require additional disclosures in the notes to the consolidated financial statements.
Eaton adopted the standard at the start of the first quarter of 2018 using the modified retrospective approach and recorded a
cumulative effect adjustment to retained earnings based on the current terms and conditions for open contracts as of January 1,
2018. The adoption of the standard did not have a material impact on the Company’s Consolidated financial statements. While,
certain revenue streams moved from point-in-time or multiple elements to over time because of the continuous transfer of
control to customers, we do not expect these changes to be material. The Company implemented the appropriate changes to
business processes and controls to support recognition and disclosure under the new standard, including the new qualitative and
quantitative disclosures that will include information on the nature, amount, timing and significant judgments impacting
revenue from contracts with customers.
In October 2016, the FASB issued Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than
Inventory (ASU 2016-16). This accounting standard requires companies to recognize the income tax effects of intercompany
sales and transfers of assets other than inventory in the period in which the transfer occurs. The previous accounting standard
required companies to defer the income tax effects of intercompany transfers of assets by recording a prepaid tax, until such
assets were sold to an outside party or otherwise recognized. ASU 2016-16 is effective for annual and interim periods
beginning after December 15, 2017. Upon adoption, ASU 2016-16 requires companies to write off any income tax amounts that
had been deferred as prepaid taxes from past intercompany transactions, and record deferred tax balances for amounts that have
not been recognized, through a cumulative-effect adjustment to retained earnings. The Company adopted ASU 2016-16 at the
start of the first quarter of 2018 by recording a cumulative-effect adjustment of approximately $200 to reduce retained earnings.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), (ASU 2016-02). This
accounting standard requires that a lessee recognize a lease asset and a lease liability on its balance sheet for all leases,
including operating leases, with a term greater than 12 months. ASU 2016-02 will require additional disclosures in the notes to
the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15,
2018. A project team has been formed to evaluate and implement the new standard. The project team is working to gather the
data required to account for leases under the new standard, and validating the functionality of third-party lease accounting
software. In addition, the Company is in the process of identifying and implementing the appropriate changes to business
processes and controls to support recognition and disclosure under the new standard. Eaton plans to adopt the standard as of the
first quarter of 2019. Eaton is evaluating the impact of ASU 2016-02 and an estimate of the impact to the consolidated financial
statements cannot be made at this time.
28
Note 2. SALE AND ACQUISITIONS OF BUSINESSES
Sale of heavy-duty and medium-duty commercial vehicle automated transmission business
On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated
transmission business for $600 in cash to Cummins, Inc. The new joint venture is named Eaton Cummins Automated
Transmission Technologies (ECATT). The Company recognized a pre-tax gain of $1,077, of which $533 related to the pre-tax
gain from the $600 proceeds from the sale and $544 related to the Company’s remaining 50% investment in the joint venture
being remeasured to fair value. The after-tax gain was $843. The fair value is based on the price paid to Eaton for the 50%
interest sold to Cummins, Inc. and further supported by a discounted cash flow model. Eaton accounts for its investment on the
equity method of accounting.
Acquisition of Ephesus Lighting, Inc.
On October 28, 2015, Eaton acquired Ephesus Lighting, Inc. (Ephesus). Ephesus is a leader in LED lighting for stadiums
and other high lumen outdoor and industrial applications. Its sales for the 12 months ended September 30, 2015 were $23.
Ephesus is reported within the Electrical Products business segment.
Acquisition of UK Safety Technology Manufacturer Oxalis Group Ltd.
On January 12, 2015, Eaton acquired Oxalis Group Ltd. (Oxalis). Oxalis is a manufacturer of closed-circuit television
camera stations, public address and general alarm systems and other electrical products for the hazardous area, marine and
industrial communications markets. Its sales for the 12 months ended December 31, 2014 were $9. Oxalis is reported within the
Electrical Systems and Services business segment.
Note 3. ACQUISITION INTEGRATION CHARGES
Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:
Electrical Products
Electrical Systems and Services
Hydraulics
Total business segments
Corporate
Total acquisition integration charges before income taxes
Income taxes
Total after income taxes
Per ordinary share - diluted
2017
2016
2015
$
4
—
—
4
—
4
2
2
$
— $
3
1
—
4
—
4
1
3
0.01
$
$
$
25
15
2
42
5
47
16
31
0.07
$
$
$
Business segment acquisition integration charges in 2017 related to the integration of Ephesus. The charges associated with
Ephesus were included in Selling and administrative expense. Business segment acquisition integration charges in 2016 related
to the integration of Ephesus and Oxalis. The charges associated with Ephesus were included in Cost of products sold and
Selling and administrative expense, while the charges associated with Oxalis were included in Cost of products sold. Business
segment acquisition charges in 2015 related primarily to the integration of Cooper Industries plc, which was acquired in 2012.
The charges in 2015 were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business
Segment Information, the charges reduced Operating profit of the related business segment.
The integration of Cooper included costs related to restructuring activities Eaton undertook in an effort to gain efficiencies
in selling, marketing, traditional back-office functions and manufacturing and distribution. These actions resulted in charges of
$20 during 2015, comprised of severance costs and other expense totaling $1 and $19, respectively, of which $14 were incurred
in the Electrical Products segment, and $6 were incurred in the Electrical Systems and Services segment.
Corporate integration charges related primarily to the acquisition of Cooper. These charges were included in Selling and
administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.
See Note 15 for additional information about business segments.
29
Note 4. RESTRUCTURING CHARGES
During 2015, Eaton announced its commitment to undertake actions to reduce its cost structure in all business segments and
at corporate. Restructuring charges incurred under this plan were $116, $211, and $129 in 2017, 2016, and 2015, respectively.
The multi-year initiative concluded at the end of 2017.
A summary of restructuring charges by type follows:
Workforce reductions
Plant closings and other costs
Total
A summary of restructuring charges by segment follows:
Electrical Products
Electrical Systems & Services
Hydraulics
Aerospace
Vehicle
Corporate
Total
2017
2016
2015
$
$
$
2017
$
$
$
57
59
116
29
16
32
2
12
25
2016
$
$
$
177
34
211
44
49
67
4
35
12
2015
112
17
129
12
29
31
5
34
18
$
116
$
211
$
129
A summary of liabilities related to workforce reductions, plant closings and other associated costs announced in 2015
follows:
Workforce
reductions
Plant closing
and other
Total
Balance at December 31, 2015
$
54
$
Liability recognized
Payments
Other adjustments
Balance at December 31, 2016
Liability recognized
Payments
Other adjustments
Balance at December 31, 2017
177
(116)
(2)
113
57
(102)
(1)
67
$
$
— $
34
(13)
(20)
1
59
(39)
(16)
5
$
54
211
(129)
(22)
114
116
(141)
(17)
72
These charges were included in Cost of products sold, Selling and administrative expenses or Other income-net, as
appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note
15 for additional information about business segments.
30
Note 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment follow:
Electrical
Products
December 31, 2015
$
Translation
December 31, 2016
Goodwill written off
from sale of business
Translation
December 31, 2017
$
6,642
(145)
6,497
—
262
6,759
Electrical
Systems
and Services
4,279
$
(76)
4,203
(3)
111
4,311
$
A summary of other intangible assets follows:
Intangible assets not subject to amortization
Trademarks
Intangible assets subject to amortization
Customer relationships
Patents and technology
Trademarks
Other
Total intangible assets subject to amortization
Hydraulics
Aerospace
Vehicle
Total
956
(18)
938
—
9
947
$
$
1,259
(38)
1,221
—
36
1,257
$
$
2017
13,479
(278)
13,201
(55)
422
13,568
343
(1)
342
(52)
4
294
$
$
2016
Historical
cost
Accumulated
amortization
Historical
cost
Accumulated
amortization
1,654
$
1,637
3,586
$
1,475
$
3,456
$
1,199
1,395
1,137
99
628
473
30
1,342
1,104
97
519
378
26
6,217
$
2,606
$
5,999
$
2,122
$
$
$
$
$
Amortization expense related to intangible assets subject to amortization in 2017, and estimated amortization expense for
each of the next five years, follows:
2017
2018
2019
2020
2021
2022
$
383
369
362
357
346
336
31
Note 6. DEBT
A summary of long-term debt, including the current portion, follows:
5.30% notes due 2017 ($150 converted to floating rate by interest rate swap)
6.10% debentures due 2017
1.50% senior notes due 2017 ($750 converted to floating rate by interest rate swap)
5.60% notes due 2018 ($415 converted to floating rate by interest rate swap)
4.215% Japanese yen notes due 2018
6.95% notes due 2019 ($300 converted to floating rate by interest rate swap)
3.875% debentures due 2020 ($150 converted to floating rate by interest rate swap)
3.47% notes due 2021 ($275 converted to floating rate by interest rate swap)
8.10% debentures due 2022 ($100 converted to floating rate by interest rate swap)
2.75% senior notes due 2022 ($1,400 converted to floating rate by interest rate swap)
3.68% notes due 2023 ($200 converted to floating rate by interest rate swap)
0.75% euro notes due 2024
6.50% debentures due 2025
3.10% senior notes due 2027
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap)
4.00% senior notes due 2032
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap)
5.80% notes due 2037
4.15% senior notes due 2042
3.92% senior notes due 2047
5.25% to 8.875% notes (maturities ranging from 2018 to 2035, including $50 converted to
floating rate by interest rate swap)
Other
Total long-term debt
Less current portion of long-term debt
Long-term debt less current portion
$
$
2017
2016
— $
—
—
450
88
300
239
300
100
1,600
300
659
145
700
200
700
136
240
1,000
300
239
49
7,745
(578)
7,167
$
250
289
1,000
450
86
300
239
300
100
1,600
300
580
145
—
200
700
136
240
1,000
—
239
109
8,263
(1,552)
6,711
Substantially all these long-term debt instruments are fully and unconditionally guaranteed on an unsubordinated, unsecured
basis by Eaton and certain of its direct and indirect subsidiaries (the Senior Notes). Further, all of these long-term debt
instruments except the 4.215% Japanese yen notes due 2018, the 3.875% debentures due 2020, the 3.47% notes due 2021, the
3.68% notes due 2023, and the 0.75% Euro notes due 2024 are registered by Eaton Corporation under the Securities Act of
1933, as amended (the Registered Senior Notes).
On November 17, 2017, Eaton refinanced a $500, four-year revolving credit facility with a $500, three-year revolving credit
facility that will expire November 17, 2020 and also refinanced a $750, five-year revolving credit facility with a $750, five-
year revolving credit facility that will expire November 17, 2022. Eaton also maintains a $750, five-year revolving credit
facility that will expire October 14, 2021. These refinancings maintain long-term revolving credit facilities at a total of $2,000.
The revolving credit facilities are used to support commercial paper borrowings and are fully and unconditionally guaranteed
by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings
outstanding under Eaton's revolving credit facilities at December 31, 2017 or 2016. The Company had available lines of credit
of $741 from various banks primarily for the issuance of letters of credit, of which there was $297 outstanding at December 31,
2017. Borrowings outside the United States are generally denominated in local currencies.
The Company repaid the 5.30% notes on March 15, 2017 for $250, the 6.10% debentures on June 29, 2017 for $289 and
the 1.50% senior notes on November 2, 2017 for $1,000. The Company repaid the 2.375% debentures on January 15, 2016, for
$240.
Short-term debt was $6 all of which was outside the United States as of December 31, 2017.
32
On September 15, 2017, a subsidiary of Eaton issued senior notes (the 2017 Senior Notes) with a face amount of $1,000.
The 2017 Senior Notes are comprised of two tranches of $700 and $300, which mature in 2027 and 2047, respectively, with
interest payable semi-annually at a respective rate of 3.1% and 3.9%. The issuer received proceeds totaling $993 from the
issuance, net of financing costs. The 2017 Senior Notes are fully and unconditionally guaranteed on an unsubordinated,
unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2017 Senior Notes contain customary optional
redemption and par call provisions. The 2017 Senior Notes also contain a change of control provision which requires the
Company to make an offer to purchase all or any part of the 2017 Senior Notes at a purchase price of 101% of the principal
amount plus accrued and unpaid interest. The capitalized deferred financing fees are amortized in Interest expense-net over the
respective terms of the 2017 Senior Notes. The 2017 Senior Notes are subject to customary non-financial covenants.
On September 20, 2016, a subsidiary of Eaton issued euro denominated notes (Euro Notes) with a face value of €550 ($615
based on the September 20, 2016 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as
amended. The Euro Notes mature in 2024 with interest payable annually at a rate of 0.75%. The issuer received proceeds
totaling €544 ($609 based on the September 20, 2016 spot rate) from the issuance, net of financing costs and discounts. The
senior Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its
direct and indirect subsidiaries. The Euro Notes contain an optional redemption provision by which the Company may make an
offer to purchase all or any part of the Euro Notes prior to June 20, 2024 at a purchase price of the greater of (a) 100% of the
principal amount of the respective Euro Notes being redeemed, or (b) the sum of the present values of the respective remaining
scheduled payments of principal and interest, discounted to the redemption date on an annual basis at the benchmark Bund Rate
plus 20 basis points. In each case, the redemption price will include any accrued and unpaid interest on the Euro Notes being
redeemed. At any time on or after June 20, 2024, the Company may redeem the Euro Notes, in whole or in part, at a redemption
price equal to 100% of the principal amount to be redeemed plus accrued and unpaid interest. The Euro Notes also contain a
change of control provision which requires the Company to make an offer to purchase all or any part of the Euro Notes at a
purchase price of 101% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees and
discounts are amortized in Interest expense - net over the respective terms of the Euro Notes. The Euro Notes are subject to
customary non-financial covenants.
Eaton is in compliance with each of its debt covenants for all periods presented.
Maturities of long-term debt for each of the next five years follow:
2018
2019
2020
2021
2022
Interest paid on debt follows:
2017
2016
2015
$
$
578
340
241
302
1,701
293
266
271
33
Note 7. RETIREMENT BENEFITS PLANS
Eaton has defined benefits pension plans and other postretirement benefits plans.
Obligations and Funded Status
Funded status
Fair value of plan assets
Benefit obligations
Funded status
Amounts recognized in the Consolidated
Balance Sheets
Non-current assets
Current liabilities
Non-current liabilities
Total
Amounts recognized in Accumulated other
comprehensive loss (pretax)
Net actuarial loss
Prior service cost (credit)
Total
Change in Benefit Obligations
Balance at January 1
Service cost
Interest cost
Actuarial (gain) loss
Gross benefits paid
Currency translation
Plan amendments
Other
Balance at December 31
Accumulated benefit obligation
$
$
$
$
$
$
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2017
2016
2017
2016
2017
2016
$
3,585
(3,961)
$
2,969
(3,771)
1,727
(2,399)
$
1,478
(2,314)
$
(376) $
(802) $
(672) $
(836) $
$
55
(448)
(393) $
74
(473)
(399)
$
82
(15)
(443)
(376) $
$
34
(24)
(812)
(802) $
$
136
(25)
(783)
(672) $
$
33
(22)
(847)
(836) $
— $
(31)
(362)
(393) $
—
(31)
(368)
(399)
1,059
4
1,063
$
$
1,232
3
1,235
$
$
596
8
604
$
$
771
8
779
$
$
$
19
(46)
(27) $
21
(60)
(39)
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2017
2016
2017
2016
2017
2016
$
3,771
$
3,829
$
2,314
$
2,175
$
473
$
3
14
2
(74)
3
—
27
575
4
17
(72)
(79)
1
—
27
$
448
$
473
96
123
271
(301)
—
1
—
111
125
52
(346)
—
—
—
$
$
3,961
3,802
$
$
3,771
3,620
$
$
71
55
(148)
(97)
223
—
(19)
2,399
2,283
$
$
63
62
355
(94)
(245)
2
(4)
2,314
2,189
34
Change in Plan Assets
Balance at January 1
Actual return on plan assets
Employer contributions
Gross benefits paid
Currency translation
Other
Balance at December 31
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2017
2016
2017
2016
2017
2016
$
2,969
$
2,934
$
1,478
$
1,472
$
543
374
(301)
—
—
221
160
(346)
—
—
$
3,585
$
2,969
$
131
99
(97)
135
(19)
1,727
$
212
102
(94)
(211)
(3)
1,478
$
74
8
20
(74)
—
27
55
$
$
93
3
30
(79)
—
27
74
The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
United States
pension liabilities
Non-United States
pension liabilities
2017
2016
2017
2016
$
3,540
$
3,342
$
3,380
3,081
3,190
2,505
$
966
911
175
1,902
1,824
1,066
Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss follow:
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2017
2016
2017
2016
2017
2016
Balance at January 1
$
1,235
$
1,327
$
779
$
653
$
Prior service cost arising during the year
Net loss (gain) arising during the year
Currency translation
Less amounts included in expense during the year
Net change for the year
Balance at December 31
Benefits Expense
1
(28)
—
(145)
(172)
1,063
$
—
81
—
(173)
(92)
1,235
$
—
(185)
66
(56)
(175)
604
$
2
235
(75)
(36)
126
$
779
$
(39) $
—
(2)
1
13
12
(27) $
21
—
(69)
1
8
(60)
(39)
United States
pension benefit expense
2015
2016
2017
Non-United States
pension benefit expense
2015
2016
2017
Other postretirement
benefits expense
2016
2017
2015
Service cost
Interest cost
Expected return on plan assets
Amortization
$
$
96
123
(244)
83
58
$
$
111
125
(250)
92
78
123
156
(262)
119
136
$
71
55
(94)
51
83
$
63
62
(92)
33
66
$
71
72
(99)
40
84
$
3
14
(4)
(13)
—
$
4
17
(6)
(9)
6
Settlements and special
termination benefits
Total expense
62
120
$
81
159
$
74
210
$
$
5
88
$
3
69
$
2
86
—
$ — $
1
7
$
6
24
(5)
2
27
—
27
35
The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic
benefit cost in 2018 follow:
Actuarial loss
Prior service cost (credit)
Total
Retirement Benefits Plans Assumptions
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
$
$
146
1
147
$
$
38
1
39
$
$
1
(14)
(13)
In 2015, 2016 and 2017, for purposes of determining liabilities related to pension plans and other postretirement benefits
plans in the United States, the Company used 2014 mortality tables and generational improvement scales that are based on
MP-2015, MP-2016 and MP-2017, respectively.
In 2016, the Company adopted a change in the method it uses to estimate the service and interest cost components of net
periodic benefit cost for its defined benefit pension and other postretirement benefit plans. Prior to 2016, for the vast majority
of its plans, the service and interest cost components were estimated using a single weighted-average discount rate derived
from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, the Company
used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the
estimation of the service and interest components of benefit cost, resulting in a more precise measurement. This change does
not affect the measurement of total benefit obligations. The change was accounted for as a change in estimate and, accordingly,
was accounted for prospectively starting in 2016. The reductions in service cost and interest cost for 2016 associated with this
change in estimate were $3 and $42, respectively.
Pension Plans
United States
pension plans
2016
2017
2015
Non-United States
pension plans
2016
2015
2017
Assumptions used to determine benefit obligation at year-end
Discount rate
Rate of compensation increase
3.64% 4.12% 4.22% 2.62% 2.63% 3.46%
3.15% 3.15% 3.18% 3.11% 3.13% 3.12%
Assumptions used to determine expense
Discount rate used to determine benefit obligation
Discount rate used to determine service cost
Discount rate used to determine interest cost
Expected long-term return on plan assets
Rate of compensation increase
4.12% 4.22% 3.97% 2.63% 3.46% 3.33%
4.31% 4.35% 3.97% 3.38% 4.13% 3.33%
3.40% 3.42% 3.97% 2.34% 3.07% 3.33%
7.90% 8.50% 8.50% 6.30% 6.62% 6.92%
3.15% 3.18% 3.16% 3.13% 3.12% 3.13%
The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical
data taking into account each plan's target asset allocation. The expected long-term rates of return on pension assets for United
States pension plans and Non-United States pension plans for 2018 are 7.52% and 6.40%, respectively. The discount rates were
determined using appropriate bond data for each country.
36
Other Postretirement Benefits Plans
Substantially all of the obligation for other postretirement benefits plans relates to United States plans. Assumptions used to
determine other postretirement benefits obligations and expense follow:
Other postretirement
benefits plans
2016
2017
2015
Assumptions used to determine benefit obligation at year-end
Discount rate
Health care cost trend rate assumed for next year
Ultimate health care cost trend rate
Year ultimate health care cost trend rate is achieved
Assumptions used to determine expense
Discount rate used to determine benefit obligation
Discount rate used to determine service cost
Discount rate used to determine interest cost
Initial health care cost trend rate
Ultimate health care cost trend rate
Year ultimate health care cost trend rate is achieved
3.55% 3.96% 4.04%
8.25% 7.35% 7.10%
4.75% 4.75% 4.75%
2025
2026
2027
3.96% 4.04% 3.79%
4.11% 4.26% 3.79%
3.18% 3.12% 3.79%
7.35% 7.10% 6.31%
4.75% 4.75% 4.77%
2024
2025
2026
Assumed health care cost trend rates may have a significant effect on the amounts reported for the health care plans. A 1-
percentage point change in the assumed health care cost trend rates would have the following effects:
Effect on total service and interest cost
Effect on other postretirement liabilities
Employer Contributions to Retirement Benefits Plans
1% increase
1% decrease
$
$
1
13
(1)
(12)
Contributions to pension plans that Eaton expects to make in 2018, and made in 2017, 2016 and 2015, follow:
United States plans
Non-United States plans
Total contributions
2018
2017
2016
2015
$
$
16
96
112
$
$
374
99
473
$
$
160
102
262
$
$
221
109
330
The following table provides the estimated pension and other postretirement benefit payments for each of the next five
years, and the five years thereafter in the aggregate. For other postretirement benefits liabilities, the expected subsidy receipts
related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 would reduce the gross payments
listed below.
2018
2019
2020
2021
2022
2023 - 2027
Estimated other postretirement
benefit payments
Gross
$
Medicare
prescription
drug subsidy
$
47
43
39
35
35
141
(2)
(2)
(2)
(1)
—
(2)
Estimated
United States
pension payments
Estimated
non-United States
pension payments
$
88
90
93
95
99
548
$
291
291
292
299
298
1,478
37
Pension Plan Assets
Investment policies and strategies are developed on a country specific basis. The United States plans, representing 67% of
worldwide pension assets, and the United Kingdom plans representing 26% of worldwide pension assets, are invested primarily
for growth, as the majority of the assets are in plans with active participants and ongoing accruals. In general, the plans have
their primary allocation to diversified global equities, primarily through index funds in the form of common collective and
other trusts. The United States plans' target allocation is 28% United States equities, 28% non-United States equities, 9% real
estate (primarily equity of real estate investment trusts), 31% debt securities and 4% other, including hedge funds, private
equity and cash equivalents. The United Kingdom plans' target asset allocations are 61% equities and the remainder in debt
securities, cash equivalents and real estate investments. The equity risk for the plans is managed through broad geographic
diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for
these plans are longer duration government and corporate debt. The United States, United Kingdom and Canada pension plans
are authorized to use derivatives to achieve more economically desired market exposures and to use futures, swaps and options
to gain or hedge exposures.
Other Postretirement Benefits Plan Assets
The Voluntary Employee Benefit Association trust which holds U.S. other postretirement benefits plan assets has investment
guidelines that include allocations to global equities and fixed income investments. The trust's 2017 target investment
allocation is 43% diversified global equities and 57% fixed income securities held in a trust that invests primarily in exchange
traded funds.
Fair Value Measurements
Financial instruments included in pension and other postretirement benefits plan assets are categorized into a fair value
hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 -
Quoted prices (unadjusted) for identical assets in active markets.
Level 2 -
Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either
directly or indirectly, for substantially the full term of the financial instrument.
Level 3 -
Unobservable prices or inputs.
Certain investments that are measured at fair value using the net asset value per share practical expedient have not been
categorized in the fair value hierarchy and are being presented in the tables to permit a reconciliation to total plan assets.
38
Pension Plans
A summary of the fair value of pension plan assets at December 31, 2017 and 2016, follows:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
2017
Common collective trusts
Non-United States equity and global equities
$
741
$
United States equity
Fixed income
Fixed income securities
United States treasuries
Bank loans
Real estate
Equity securities
Cash equivalents
Exchange traded funds
Other
Common collective and other trusts measured at net asset
value
Hedge funds measured at net asset value
Money market funds measured at net asset value
86
478
709
67
161
239
139
86
224
81
2,225
67
9
— $
—
—
—
67
—
220
139
51
224
—
741
$
86
478
709
—
161
—
—
35
—
8
—
—
—
—
—
—
19
—
—
—
73
Total pension plan assets
$
5,312
$
701
$
2,218
$
92
39
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
2016
Common collective trusts
Non-United States equity and global equities
$
413
$
United States equity
Fixed income
Fixed income securities
United States treasuries
Bank loans
Real estate
Equity securities
Cash equivalents
Exchange traded funds
Other
Common collective and other trusts measured at net asset
value
Hedge funds measured at net asset value
Money market funds measured at net asset value
94
422
359
123
150
201
104
276
55
109
2,038
85
18
— $
—
—
—
123
—
195
104
21
55
—
413
$
94
422
359
—
150
—
—
255
—
14
—
—
—
—
—
—
6
—
—
—
95
Total pension plan assets
$
4,447
$
498
$
1,707
$
101
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2016 and 2017
due to the following:
Real estate
Other
Total
$
7
$
86
$
—
(1)
—
6
1
12
—
19
(6)
15
—
95
(5)
(17)
—
$
73
$
93
(6)
14
—
101
(4)
(5)
—
92
Balance at December 31, 2015
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end
Purchases, sales, settlements - net
Transfers into or out of Level 3
Balance at December 31, 2016
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end
Purchases, sales, settlements - net
Transfers into or out of Level 3
Balance at December 31, 2017
$
40
Other Postretirement Benefits Plans
A summary of the fair value of other postretirement benefits plan assets at December 31, 2017 and 2016, follows:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
7
$
7
$
— $
48
55
$
7
$
— $
—
—
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
8
$
8
$
— $
66
74
$
8
$
— $
—
—
$
$
$
$
2017
Cash equivalents
Common collective and other trusts measured at net asset
value
Total other postretirement benefits plan assets
2016
Cash equivalents
Common collective and other trusts measured at net asset
value
Total other postretirement benefits plan assets
Valuation Methodologies
Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets
measured at fair value. There have been no changes in the methodologies used at December 31, 2017 and 2016.
Common collective and other trusts - Valued at the net unit value of units held by the trust at year end. The unit value is
determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments
in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public
markets based upon readily measurable prices. The investments in other trusts are predominantly in exchange traded funds
for which the underlying securities are actively traded in public markets based upon readily measurable prices. Common
collective and other trusts measured at fair value using the net asset value per share practical expedient have not been
categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value
hierarchy to the total plan assets.
Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest
obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt
securities is determined through third-party pricing models that consider various assumptions, including time value, yield
curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates
the pricing classification of these securities by performing analyses using other third-party sources.
United States treasuries - Valued at the closing price of each security.
Bank loans - These securities consist of senior secured term loans of publicly traded and privately held United States and
non-United States floating rate obligations (principally corporations of non-investment grade rating). The fair value is
determined through third-party pricing models that primarily utilize dealer quoted current market prices. The Company
verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing
analyses using other third-party sources.
41
Equity securities - These securities consist of direct investments in the stock of publicly traded companies. Such
investments are valued based on the closing price reported in an active market on which the individual securities are traded.
As such, the direct investments are classified as Level 1.
Real estate - Consists of direct investments in the stock of publicly traded companies and investments in pooled funds that
invest directly in real estate. The publicly traded companies are valued based on the closing price reported in an active
market on which the individual securities are traded and as such are classified as Level 1. The pooled funds rely on
appraisal based valuations and as such are classified as Level 3.
Cash equivalents - Primarily certificates of deposit, commercial paper, and repurchase agreements.
Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.
Hedge funds - Consists of direct investments in hedge funds through limited partnership interests. Net asset values are based
on the estimated fair value of the ownership interest in the investment as determined by the General Partner. The majority of
the holdings of the hedge funds are in equity securities traded on public exchanges. The investment terms of the hedge
funds allow capital to be redeemed quarterly given prior notice with certain limitations. Hedge funds measured at fair value
using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being
presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Money market funds - Money market funds measured at fair value using the net asset value per share practical expedient
have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of
the fair value hierarchy to the total plan assets.
Other - Primarily insurance contracts for international plans and also futures contracts and over-the-counter options. These
investments are valued based on the closing prices of future contracts or indices as available on Bloomberg or similar
service, and private equity investments.
For additional information regarding fair value measurements, see Note 12.
Defined Contribution Plans
The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The
total contributions related to these plans are charged to expense and were as follows:
2017
2016
2015
$
114
72
137
42
Note 8. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
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, antitrust matters and employment-related matters. Eaton is also
subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs
associated with these claims and proceedings. 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. During the
fourth quarter of 2016, the Company was able to resolve several insurance matters. In total, the income from insurance matters
was $68.
In December 2011, Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) filed an action against (a) Cooper Industries,
LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively, “Cooper”), (b)
M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc.
(collectively, “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust (the “Trust”) in Texas state court. Pepsi
alleged that it was harmed by a 2011 settlement agreement (“2011 Settlement”) among Cooper, Mafco, and Pneumo Abex, LLC
(“Pneumo,” which prior to the 2011 Settlement was a Mafco subsidiary), which settlement resolved litigation that Pneumo had
previously brought against Cooper involving, among other things, a guaranty related to Pneumo’s friction products business. In
November 2015, after a Texas court ruled that Pepsi's claims should be heard in arbitration, Pepsi filed a demand for arbitration
against Cooper, Mafco, the Trust, and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An
arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts have
opined, among other things, that the value contributed to the Trust for a release of the guaranty was approximately $440 below
reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities may result in plaintiffs suing Pepsi
under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts opine that Pepsi has
no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations
under the guaranty. The arbitration proceedings closed in December 2017. The parties are awaiting the issuance of a decision.
The Company believes that the claims of Pepsi are without merit, and that the ultimate resolution of this matter will not have a
material impact on the Company’s consolidated financial statements.
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. The judgment was based
on an alleged violation of an agency agreement between Raysul and Saturnia. At March 31, 2016, the Company had a total
accrual of 100 Brazilian Reais related to this matter ($31 based on June 2016 exchange rates). In June 2016, Eaton signed a
settlement agreement and resolved the matter, which did not have a material impact on the consolidated financial statements.
Environmental Contingencies
Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and
with a positive commitment to the protection of the natural and workplace environments. The Company's manufacturing
facilities are required to be certified to ISO 14001, an international standard for environmental management systems. The
Company routinely reviews EHS performance at each of its facilities and continuously strives to improve pollution prevention.
Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of
its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party under the
United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites. The Company became
involved in these sites as a result of government action or in connection with business acquisitions. At the end of 2017, the
Company was involved with a total of 118 sites worldwide, including the Superfund sites mentioned above, with none of these
sites being individually significant to the Company.
Remediation activities, generally involving soil and/or groundwater contamination, include pre-cleanup activities such as
fact finding and investigation, risk assessment, feasibility study, design and action planning, performance (where actions may
range from monitoring, to removal of contaminants, to installation of longer-term remediation systems), and operation and
maintenance of a remediation system. The extent of expected remediation activities and costs varies by site. A number of
factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the
determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental
regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated
the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an undiscounted basis,
consistent with the estimates of these costs, when it is probable that a liability has been incurred. Actual results may differ from
these estimates. At December 31, 2017 and 2016, the Company had an accrual totaling $120 and $124, respectively, for these
costs.
43
Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum
it may be required to pay in connection with environmental matters is not reasonably possible to exceed the recorded liability
by an amount that would have a material effect on its financial position, results of operations or cash flows.
Warranty Accruals
A summary of the current and long-term warranty accruals follows:
Balance at January 1
Provision
Settled
Other
Balance at December 31
Lease Commitments
2017
2016
2015
180
$
195
$
163
(156)
1
188
$
117
(130)
(2)
180
$
213
104
(114)
(8)
195
$
$
Eaton leases certain real properties and equipment. A summary of minimum rental commitments at December 31, 2017
under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the
next five years and thereafter in the aggregate, follow:
2018
2019
2020
2021
2022
Thereafter
Total noncancelable lease commitments
A summary of rental expense follows:
2017
2016
2015
$
$
$
159
119
85
63
42
71
539
222
220
225
44
Note 9. INCOME TAXES
Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory
accounting methods, as described in Notes 1 and 14.
Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are
summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable.
Income (loss) before income taxes
2016
2015
2017
Ireland
Foreign
Total income before income taxes
Current
Ireland
Foreign
United States
Non-United States
Total current income tax expense
Deferred
Ireland
Foreign
United States
Non-United States
Total deferred income tax expense (benefit)
Total income tax expense
$
$
$
$
(1,090) $
4,458
3,368
$
(923) $
3,041
2,118
$
(608)
2,741
2,133
Income tax expense (benefit)
2017
2016
2015
1
$
2
$
123
234
358
—
82
(58)
24
382
$
93
209
304
2
(77)
(30)
(105)
199
$
8
110
240
358
1
(76)
(124)
(199)
159
45
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate
follow:
Income taxes at the applicable statutory rate
Ireland operations
Ireland tax on trading income
Nondeductible interest expense
Foreign operations
United States operations (earnings taxed at other than
the applicable statutory rate)
U.S. federal tax rate change
U.S. tax on foreign earnings
U.S. foreign tax credit
Credit for research activities
U.S. Other - net
Non-U.S. operations (earnings taxed at other than
the applicable statutory tax rate)
Non-U.S. operations - other items
Worldwide operations
Adjustments to tax liabilities
Adjustments to valuation allowances
Effective income tax expense rate
2017
2016
2015
25.0 %
25.0 %
25.0 %
— %
8.2 %
(0.3)%
11.5 %
(0.4)%
7.9 %
1.7 %
(7.5)%
4.8 %
(3.9)%
(0.5)%
3.2 %
0.1 %
— %
— %
0.6 %
(0.8)%
2.5 %
(0.6)%
— %
— %
(0.8)%
(0.8)%
5.4 %
(22.9)%
0.4 %
(26.8)%
0.9 %
(25.1)%
(0.5)%
(1.8)%
4.6 %
11.3 %
(2.5)%
(0.8)%
9.4 %
(1.4)%
(1.2)%
7.5 %
During 2017, income tax expense of $382 was recognized (an effective tax rate of 11.3%) compared to income tax expense
of $199 for 2016 (an effective tax rate of 9.4%) and income tax expense of $159 for 2015 (an effective tax rate of 7.5%). The
2017 effective tax rate includes tax expense of $234 on the gain related to the sale of business discussed in Note 2 and a tax
benefit of $62 related to the U.S. Tax Cuts and Jobs Act (TCJA) which is discussed in further detail below. Excluding the gain
and related tax impact on the sale of business, and the impact of the TCJA, the effective tax rate for 2017 was expense of 9.2%.
The decrease from 9.4% for 2016 compared to 9.2% for 2017 was due to the resolution of tax contingencies in various tax
jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of Accounting
Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The increase from 7.5% for 2015 compared to 9.4% for 2016 is primarily due to greater levels of income earned in higher tax
jurisdictions, partially offset by net decreases in worldwide tax liabilities.
The U.S. Tax Cuts and Jobs Act was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate
from 35% to 21% and requires a one-time transition tax on certain unremitted earnings of non-U.S. subsidiaries owned directly
or indirectly by U.S. subsidiaries of the Company. For 2017, we have recorded a provisional tax benefit amount of $62 for the
impact on our deferred tax balances and the one-time transition tax.
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse
in the future, which is generally 21%. Additionally, given the significant changes included in the TCJA, the Company re-
evaluated the realizability of certain deferred tax assets, including foreign tax credits and interest deferral, and determined that
valuation allowances needed to be adjusted. The Company is still analyzing certain aspects of the TCJA, including
interpretations by state and local tax authorities, and additional Treasury guidance may be issued which could potentially affect
the measurement of these balances or give rise to new deferred tax amounts. The Company recorded a provisional $79 tax
benefit for the remeasurement of deferred tax balances and related valuation allowances.
46
The one-time transition tax is based on post-1986 unremitted earnings and profits (E&P) of non-U.S. subsidiaries owned
directly or indirectly by U.S. subsidiaries of the Company which have been previously deferred from U.S. income taxes. The
amount of the transition tax also depends on the amount of E&P held in cash or other specified assets. The Company recorded a
provisional tax expense of $17 for the transition tax. This amount may change when Treasury issues additional guidance and
the Company finalizes the calculation of E&P, including the amounts held in cash or other specified assets, and finalizes the
calculation of available foreign tax credits.
No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $22.1
billion at December 31, 2017, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign
subsidiaries. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable
on the remittance of such undistributed earnings.
The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. The cash
that is permanently reinvested is typically used to expand operations either organically or through acquisitions. In addition, the
Company expects that minimal to no Irish tax would apply to dividends paid to the Irish parent due to the impact of the Irish
foreign tax credit system. The Company's public dividends and share repurchases are funded primarily from Non-U.S.
operations.
Worldwide income tax payments, net of tax refunds, follow:
2017
2016
2015
Deferred Income Tax Assets and Liabilities
Components of noncurrent deferred income taxes follow:
Accruals and other adjustments
Employee benefits
Depreciation and amortization
Other accruals and adjustments
Ireland income tax loss carryforwards
Foreign income tax loss carryforwards
Foreign income tax credit carryforwards
Valuation allowance for income tax loss and income tax
credit carryforwards
Other valuation allowances
Total deferred income taxes
$
288
272
302
2017
2016
Noncurrent
assets and
liabilities
Noncurrent
assets and
liabilities
$
$
$
430
(1,324)
380
1
1,962
404
(1,992)
(146)
(285) $
761
(1,823)
761
1
1,796
277
(1,728)
(41)
4
At December 31, 2017, Eaton Corporation plc and certain Irish subsidiaries had tax loss carryforwards that are available to
reduce future taxable income and tax liabilities. These carryforwards and their respective expiration dates are summarized
below:
Ireland income tax loss carryforwards
Ireland deferred income tax assets for income tax loss
carryforwards
2018
through
2022
2023
through
2027
2028
through
2032
2033
through
2037
$
— $
— $
— $
— $
Not
subject to
expiration
8
Valuation
allowance
—
$
—
—
—
—
1
(1)
47
At December 31, 2017, the Company's foreign subsidiaries, including all U.S. and non-U.S. subsidiaries, had income tax
loss carryforwards and income tax credit carryforwards that are available to reduce future taxable income or tax liabilities.
These carryforwards and their respective expiration dates are summarized below:
Foreign income tax loss carryforwards
Foreign deferred income tax assets for income tax loss
carryforwards
Foreign deferred income tax assets for income tax loss
carryforwards after ASU 2013-11
Foreign income tax credit carryforwards
Foreign income tax credit carryforwards after ASU
2013-11
Recoverability of Deferred Income Tax Assets
2018
through
2022
$
918
2023
through
2027
$ 7,528
2028
through
2032
2033
through
2037
$
14
$
545
Not
subject to
expiration
4,047
$
Valuation
allowance
—
$
112
101
86
82
721
715
205
168
14
14
78
27
175
86
115
94
1,047
(1,830)
1,047
64
33
(1,830)
(161)
(161)
Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax
provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations
in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities
that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and
income tax loss carryforwards and income tax credit carryforwards.
Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the
Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and
prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and
no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead
management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction
in the three-year period including the current and prior two years, management then considers a series of factors in the
determination of whether the deferred income tax assets can be realized. These factors include historical operating results,
known or planned operating developments, the period of time over which certain temporary differences will reverse,
consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country,
prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the
same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if
the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country,
management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets
exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management
would establish a valuation allowance.
Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the
extent they are not expected to be realized within the particular tax carryforward period.
Unrecognized Income Tax Benefits
A summary of gross unrecognized income tax benefits follows:
Balance at January 1
Increases and decreases as a result of positions taken during prior years
Transfers from valuation allowances
Other increases, including currency translation
Other decreases, including currency translation
Balances related to acquired businesses
Increases as a result of positions taken during the current year
Decreases relating to settlements with tax authorities
Decreases as a result of a lapse of the applicable statute of limitations
Balance at December 31
$
48
2017
2016
2015
$
629
$
584
$
493
—
10
(30)
—
162
(10)
(26)
735
$
—
21
(24)
—
90
(19)
(23)
629
$
—
34
(34)
(1)
109
—
(17)
584
Eaton's long-term policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would
be sustained upon audit. For example, the Company does not enter into any of the United States Internal Revenue Service (IRS)
Listed Transactions as set forth in Treasury Regulation 1.6011-4.
If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be $652.
As of December 31, 2017 and 2016, Eaton had accrued approximately $80 and $94, respectively, for the payment of
worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton
recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The
Company has accrued penalties in jurisdictions primarily where they are automatically applied to any deficiency, regardless of
the merit of the position.
As part of Eaton’s broader efforts to streamline operations, accelerate organic growth, and increase administrative
efficiencies, the Company centralized certain activities and assets, which resulted in an increase in current income taxes
payable, prepaid tax, and unrecognized tax benefits for 2017. These changes did not impact the Company’s 2017 effective tax
rate.
The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as
the prospect of retroactive regulations; new case law; and the willingness of the income tax authority to settle the issue,
including the timing thereof. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to
estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to
estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant
change.
Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. With only few exceptions,
Irish and non-United States subsidiaries of Eaton are no longer subject to examinations for years before 2007.
The United States Internal Revenue Service (“IRS”) has completed its examination of Eaton Corporation and Includible
Subsidiaries’ (Eaton Corp.) United States income tax returns for 2005 through 2010 and has issued Statutory Notices of
Deficiency (Notices) as discussed below. The statute of limitations on these tax years remains open until the matters are
resolved. The IRS is currently examining tax years 2011 through 2013. The statute of limitations for tax years 2011 through
2013 is open until August 31, 2018. Tax years 2014 through 2016 are still subject to examination by the IRS.
Eaton is also under examination for the income tax filings in various states and localities of the United States. With only a
few exceptions, Eaton Corp. is no longer subject to income tax examinations from states and localities within the United States
for years before 2012. Income tax returns of states and localities within the United States will be reopened to the extent of
United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. Some states and
localities may not limit their assessment to the United States federal adjustments, and may require the opening of the entire tax
year. In addition, with only a few exceptions, BZ Holdings Inc. and Includible Subsidiaries (the former U.S. holding company
for Cooper Industries) are no longer subject to United States state and local income tax examinations for years before 2012.
In 2011, the IRS issued a Notice for Eaton Corp. for the 2005 and 2006 tax years (the 2011 Notice). The 2011 Notice
proposed assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for
products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies
located in the U.S.. Eaton Corp. has set its transfer prices for products sold between these affiliates at the same prices that Eaton
Corp. sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton Corp.
entered into with the IRS that governed the 2005-2010 tax years. The Company has continued to apply the arms-length transfer
pricing methodology for 2011 through the current reporting period. Immediately prior to the 2011 Notice being issued, the IRS
sent a letter stating that it was retrospectively canceling the APAs. Eaton Corp. contested the proposed assessments in United
States Tax Court. The case involved both whether the APAs should be enforced and, if not, the appropriate transfer pricing
methodology. On July 26, 2017, the United States Tax Court issued a ruling in which it agreed with Eaton Corp. that the IRS
must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material
impact on Eaton’s consolidated financial statements.
49
In 2014, Eaton Corp. received a Notice from the IRS for the 2007 through 2010 tax years (the 2014 Notice) proposing
assessments of $190 in additional taxes plus $72 in penalties, net of agreed credits and deductions, which the company has also
contested in Tax Court. The proposed assessments pertain primarily to the same transfer pricing issues and APA for which the
Tax Court has issued its ruling during 2017 as noted above. The Company believes that the Tax Court’s ruling for tax years
2005-2006 will also be applicable to the 2007-2010 years. Following the issuance of the Tax Court’s ruling, Eaton and the IRS
recognized that the ruling on the enforceability of the APAs did not address a secondary issue regarding the transfer pricing for
a certain royalty paid from 2006-2010. Eaton Corp. reported a consistent royalty rate for 2006-2010. The IRS has agreed to the
royalty rate as reported by Eaton Corp. in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to
apply the same royalty rate in the 2007-2010 years.
The 2014 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton
Corp.’s controlled foreign corporations. The Company believes that the proposed assessment is without merit. Eaton and the
IRS have both moved for partial summary judgment on this issue. The Tax Court heard oral arguments on the motions in
January 2018, following which the Court ordered further briefing.
During 2010, the Company received a tax assessment of $49 (translated at the December 31, 2017 exchange rate), plus
interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill
generated from the acquisition of third-party businesses and corporate reorganizations. The Company is contesting the
assessment, which is under review at the administrative appeals level. During 2013, the Brazilian tax authorities began an audit
of tax years 2009 through 2012. During 2014, the Company received a tax assessment of $37 (translated at the December 31,
2017 exchange rate), plus interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues
concerning the 2005 through 2008 tax years), which the Company is also contesting and is under review at the administrative
appeals level. Multiple outside advisors have stated that Brazilian tax authorities are raising the issue for most clients with
similar facts and that the matter is expected to require at least 10 years to resolve. The Company continues to believe that final
resolution of the assessments will not have a material impact on its consolidated financial statements.
50
Note 10. EATON SHAREHOLDERS' EQUITY
There are 750 million Eaton ordinary shares authorized ($0.01 par value per share), 439.9 million and 449.4 million of
which were issued and outstanding at December 31, 2017 and 2016, respectively. Eaton's Memorandum and Articles of
Association authorized 40 thousand deferred ordinary shares (€1.00 par value per share) and 10 thousand preferred A shares
($1.00 par value per share), all of which were issued and outstanding at December 31, 2017 and 2016, and 10 million serial
preferred shares ($0.01 par value per share), none of which is outstanding at December 31, 2017 and 2016. At December 31,
2017, there were 13,089 holders of record of Eaton ordinary shares. Additionally, 20,138 current and former employees were
shareholders through participation in the Eaton Savings Plan, Eaton Personal Investment Plan, or the Eaton Puerto Rico
Retirement Savings Plan.
On October 22, 2013, Eaton's Board of Directors adopted a share repurchase program (the 2013 Program). Under the 2013
Program, the ordinary shares were expected to be repurchased over time, depending on market conditions, the market price of
ordinary shares, capital levels, and other considerations. During 2016 and 2015, 1.5 million and 11.3 million ordinary shares
were repurchased under the 2013 Program in the open market at a total cost of $82 and $682, respectively. On February 24,
2016, the Board of Directors approved a new share repurchase program for share repurchases up to $2,500 of ordinary shares
(2016 Program). Under the 2016 Program, the ordinary shares are expected to be repurchased over time, depending on market
conditions, the market price of ordinary shares, capital levels, and other considerations. During 2017 and 2016, 11.5 million
and 10.3 million shares, respectively, were purchased on the open market under the 2016 Program for a total cost of $850 and
$648, respectively.
Eaton has deferral plans that permit certain employees and directors to defer a portion of their compensation. A trust
contains $11 and $13 of ordinary shares and marketable securities at December 31, 2017 and 2016, respectively, to fund a
portion of these liabilities. The marketable securities were included in Other assets and the ordinary shares were included in
Shareholders' equity at historical cost.
On February 28, 2018, Eaton's Board of Directors declared a quarterly dividend of $0.66 per ordinary share, a 10% increase
over the dividend paid in the fourth quarter of 2017. The dividend is payable on March 23, 2018, to shareholders of record at
the close of business on March 12, 2018.
Comprehensive Income (Loss)
Comprehensive income (loss) consists primarily of net income, 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 pre-tax and after-tax amounts
recognized in Comprehensive income (loss):
2017
2016
2015
Currency translation and related hedging instruments
Pensions and other postretirement benefits
Prior service credit (cost) arising during the year
Net gain (loss) arising during the year
Currency translation
Other
Amortization of actuarial loss and prior service cost
reclassified to earnings
Cash flow hedges
Gain (loss) on derivatives designated as cash flow hedges
Changes in cash flow hedges reclassified to earnings
Cash flow hedges, net of reclassification adjustments
Other comprehensive income (loss) attributable to Eaton
ordinary shareholders
Pre-tax
800
$
After-tax
807
$
After-tax
Pre-tax
After-tax
$ (562) $ (570) $ (1,080) $ (1,078)
Pre-tax
(1)
215
(67)
—
188
335
(24)
17
(7)
—
169
(53)
(5)
130
241
(15)
11
(4)
(2)
(247)
74
—
201
26
(21)
8
(13)
(2)
(197)
62
(2)
133
(6)
(14)
5
(9)
1
(123)
62
—
237
177
20
(16)
4
1
(89)
46
(3)
156
111
13
(10)
3
$ 1,128
$ 1,044
$ (549) $ (585) $ (899) $ (964)
51
The changes in Accumulated other comprehensive loss follow:
Currency
translation and
related hedging
instruments
Pensions and
other
postretirement
benefits
Cash flow
hedges
Total
Balance at December 31, 2016
$
(3,062) $
(1,380) $
(6) $
(4,448)
Other comprehensive income (loss) before
reclassifications
Amounts reclassified from Accumulated other
comprehensive loss (income)
Net current-period Other comprehensive
income (loss)
Balance at December 31, 2017
807
—
111
130
807
(2,255) $
241
(1,139) $
$
(15)
11
(4)
(10) $
903
141
1,044
(3,404)
The reclassifications out of Accumulated other comprehensive loss follow:
Amortization of defined benefit pension and other
postretirement benefits items
Actuarial loss and prior service cost
Tax benefit
Total, net of tax
Gains and (losses) on cash flow hedges
Currency exchange contracts
Tax benefit
Total, net of tax
Total reclassifications for the period
December 31, 2017
Consolidated Statements of
Income classification
$
$
1
(188)
58
(130)
(17) Cost of products sold
6
(11)
(141)
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 7 for
additional information about defined benefit pension and other postretirement benefits items.
Net Income Per Share Attributable to Eaton Ordinary Shareholders
A summary of the calculation of net income per share attributable to Eaton ordinary shareholders follows:
(Shares in millions)
Net income attributable to Eaton ordinary shareholders
2017
2016*
2015*
$
2,985
$
1,916
$
1,972
Weighted-average number of ordinary shares outstanding - diluted
Less dilutive effect of equity-based compensation
Weighted-average number of ordinary shares outstanding - basic
447.0
2.5
444.5
456.5
1.5
455.0
Net income per share attributable to Eaton ordinary shareholders
Diluted
Basic
$
$
6.68
6.71
$
4.20
4.21
467.1
1.6
465.5
4.22
4.23
*Certain amounts have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as
described in Notes 1 and 14.
In 2017, 2016, and 2015, 0.4 million, 1.7 million, and 1.6 million stock options, respectively, were excluded from the
calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options
exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been
antidilutive.
52
Note 11. EQUITY-BASED COMPENSATION
Restricted Stock Units and Awards
Restricted stock units (RSUs) and restricted stock awards (RSAs) have been issued to certain employees and
directors. Participants awarded RSUs in 2015 and 2016 do not receive dividends; therefore, the fair value is determined by
reducing the closing market price of the Company’s ordinary shares on the date of grant by the present value of the estimated
dividends had they been paid. The fair value of RSUs awarded in 2017 and RSAs are determined based on the closing market
price of the Company’s ordinary shares at the date of grant. The RSUs entitle the holder to receive one ordinary share for each
RSU upon vesting, generally over three years. RSAs are issued and outstanding at the time of grant, but remain subject to
forfeiture until vested, generally over three or four years. A summary of the RSU and RSA activity for 2017 follows:
(Restricted stock units and awards in millions)
Non-vested at January 1
Granted
Vested
Forfeited
Non-vested at December 31
Information related to RSUs and RSAs follows:
Pretax expense for RSUs and RSAs
After-tax expense for RSUs and RSAs
Fair value of vested RSUs and RSAs
Number of restricted
stock units and awards
Weighted-average fair
value per unit and award
2.6
$
0.9
(0.9)
(0.2)
2.4
$
57.87
72.09
61.80
61.66
62.24
2017
2016
2015
$
$
66
43
73
$
65
42
71
68
44
110
As of December 31, 2017, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $79,
and the weighted-average period in which the expense is expected to be recognized is 2.3 years. Excess tax benefit for RSUs
and RSAs totaled $2 for 2017. There was no excess tax benefit for RSUs and RSAs in 2016 and 2015.
Performance Share Units
In February 2017 and 2016, the Compensation and Organization Committee of the Board of Directors approved the grant of
performance share units (PSUs) to certain employees that vest based on the satisfaction of a three-year service period and total
shareholder return relative to that of a group of peers. Awards earned at the end of the three-year vesting period range from 0%
to 200% of the targeted number of PSUs granted based on the ranking of total shareholder return of the Company, assuming
reinvestment of all dividends, relative to a defined peer group of companies. Equity-based compensation expense for these
PSUs is recognized over the period during which an employee is required to provide service in exchange for the award. Upon
vesting, dividends that have accumulated during the vesting period are paid on earned awards.
The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions. The principal
assumptions utilized in valuing these PSUs include the expected stock price volatility (based on the most recent 3-year period
as of the grant date) and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon bonds
with a 3-year maturity as of the grant date). A summary of the assumptions used in determining fair value of these PSUs
follows:
Expected volatility
Risk-free interest rate
Weighted-average fair value of PSUs granted
2017
2016
24%
1.46%
80.07
$
24%
0.88%
76.41
$
53
A summary of the 2017 activity for these PSUs follows:
(Performance share units in millions)
Non-vested at January 1
Granted1
Vested
Forfeited
Non-vested at December 31
Number of
performance
share units
Weighted-average fair
value per unit
0.5
0.4
—
(0.1)
0.8
$
$
76.41
80.07
—
77.90
77.97
1 Performance shares granted assuming the Company will perform at target relative to peers.
In February 2015 and 2016, performance share units were granted to certain employees that entitles the holder to receive
one ordinary share for each PSU that vest based on the satisfaction of a three-year service period and the achievement of certain
performance metrics over that same period. Upon vesting, PSU holders receive dividends that accumulate during the vesting
period. The fair value of these PSUs is determined based on the closing market price of the Company's ordinary shares at the
date of grant. Equity-based compensation expense is recognized over the period an employee is required to provide service
based on the number of PSUs for which achievement of the performance objectives is probable. A summary of the 2017 activity
for these PSUs follows:
(Performance share units in millions)
Non-vested at January 1
Granted
Vested
Forfeited
Non-vested at December 31
Information related to PSUs follows:
Pretax expense for PSUs
After-tax expense for PSUs
Number of
performance
share units
Weighted-average fair
value per unit
0.7
$
—
(0.1)
(0.5)
0.1
$
68.23
—
71.72
71.72
56.55
2017
2016
2015
$
$
22
13
$
13
8
2
1
As of December 31, 2017, total compensation expense not yet recognized related to non-vested PSUs was $30 and the
weighted average period in which the expense is to be recognized is 1.6 years. There was no excess tax benefit for PSUs in
2017, 2016 and 2015.
Stock Options
Under various plans, stock options have been granted to certain employees and directors to purchase ordinary shares at
prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period
following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options
based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or
director is required to provide service.
54
The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal
assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical
period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the
expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon
with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of
stock options follows:
Expected volatility
Expected option life in years
Expected dividend yield
Risk-free interest rate
2017
2016
2015
27%
6.6
2.8%
1.8 to 2.1%
27%
5.5
2.5%
1.2 to 1.5%
29%
5.5
2.6%
1.6 to 1.5%
Weighted-average fair value of stock options granted
$
15.11
$
11.80
$
15.25
A summary of stock option activity follows:
(Options in millions)
Outstanding at January 1, 2017
Granted
Exercised
Forfeited and canceled
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Reserved for future grants at December 31, 2017
Weighted-average
exercise price per
option
Options
Weighted-average
remaining
contractual life
in years
Aggregate
intrinsic
value
$
$
$
56.75
71.89
46.31
59.23
62.43
61.06
5.5
0.7
(1.5)
(0.1)
4.6
2.9
15.0
6.3
5.1
$
$
77.3
52.1
The aggregate intrinsic value in the table above represents the total excess of the $79.01 closing price of Eaton ordinary
shares on the last trading day of 2017 over the exercise price of the stock option, multiplied by the related number of options
outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value
changes based on the daily changes in the fair market value of the Company's ordinary shares.
Information related to stock options follows:
Pretax expense for stock options
After-tax expense for stock options
Proceeds from stock options exercised
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated
Statements of Cash Flows
Excess tax benefit classified in financing activities in the
Consolidated Statements of Cash Flows
Intrinsic value of stock options exercised
Total fair value of stock options vested
2017
2016
2015
$
$
11
8
66
13
—
41
11
$
$
14
9
74
5
1
42
14
$
$
12
8
52
4
1
44
12
Stock options exercised, in millions of options
1.5
1.9
1.4
As of December 31, 2017, total compensation expense not yet recognized related to non-vested stock options was $8.8, and
the weighted-average period in which the expense is expected to be recognized is 1.7 years.
55
Note 12. 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 should
be 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.
A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
2017
Cash
Short-term investments
Net derivative contracts
2016
Cash
Short-term investments
Net derivative contracts
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
$
$
$
561
534
36
543
$
203
(3)
$
$
561
534
—
543
203
—
— $
—
36
— $
—
(3)
—
—
—
—
—
—
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 measured using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $7,745 and fair value of $8,048 at
December 31, 2017 compared to $8,263 and $8,477, respectively, at December 31, 2016. The fair value of Eaton's debt
instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and
is considered a Level 2 fair value measurement.
As discussed in Note 2, on July 31, 2017 Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle
automated transmission business to Cummins, Inc. Eaton's remaining 50% interest was remeasured to a fair value of $600 on
July 31, 2017 using a discounted cash flow model which is considered a Level 3 fair value measurement. The model includes
estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital
used to discount those estimated cash flows. Eaton will account for its investment on the equity method of accounting.
Short-Term Investments
Eaton invests excess cash generated from operations in short-term marketable investments. For those investments classified
as “available-for-sale”, Eaton marks these investments to fair value with the offset recognized in Accumulated other
comprehensive loss. A summary of the carrying value of short-term investments follows:
Time deposits, certificates of deposit and demand deposits with banks
Money market investments
Total short-term investments
2017
2016
$
$
435
99
534
$
$
149
54
203
56
Note 13. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency
exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments,
primarily interest rate swaps, currency forward exchange contracts, 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 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
designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge
transaction. This process includes linking 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 loss and reclassified to income in the same
period when the gain or loss on the hedged item is included in income.
Hedges of the 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 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. The cash flows resulting
from these financial instruments are classified in operating activities on the Consolidated Statements of Cash Flows.
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 2017 and 2016, Eaton recognized gains of $2 and $7,
respectively, associated with these commodity hedge contracts. Gains and losses associated with commodity hedge contracts
are classified in Cost of products sold.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations
against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative
net investment hedging instruments on an after-tax basis was $88 and $86 at December 31, 2017 and 2016, respectively, and
designated on a pre-tax basis was $652 and $572 at December 31, 2017 and 2016, respectively. See Note 6 for additional
information about debt.
Interest Rate Risk
Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk of certain long-term debt. These
interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with
the maturity of the debt instrument as noted in the table of long-term debt in Note 6. Eaton also entered into several forward
starting floating-to-fixed interest rate swaps to manage interest rate risk in anticipation of debt that was refinanced in 2017.
57
A summary of interest rate swaps outstanding at December 31, 2017, follows:
Fixed-to-Floating Interest Rate Swaps
$
Notional
amount
415
300
25
150
275
100
1,400
200
25
50
25
Fixed interest
rate received
5.60%
6.95%
8.88%
3.88%
3.47%
8.10%
2.75%
3.68%
7.63%
7.65%
5.45%
Floating interest
rate paid
4.59%
6.31%
5.24%
3.22%
2.84%
7.08%
1.66%
2.17%
3.87%
3.98%
1.68%
Derivative Financial Statement Impacts
Basis for contracted floating interest rate paid
6 month LIBOR + 3.18%
3 month LIBOR + 5.07%
6 month LIBOR + 3.84%
1 month LIBOR + 2.12%
1 month LIBOR + 1.74%
1 month LIBOR + 5.90%
1 month LIBOR + 0.58%
1 month LIBOR + 1.07%
6 month LIBOR + 2.48%
6 month LIBOR + 2.57%
6 month LIBOR + 0.28%
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets follows:
Notional
amount
Other
current
assets
Other
noncurrent
assets
Other
current
liabilities
Other
noncurrent
liabilities
Type of
hedge
Term
December 31, 2017
Derivatives designated as hedges
Fixed-to-floating interest rate swaps $ 2,965
924
Currency exchange contracts
Total
Derivatives not designated as hedges
Currency exchange contracts
Commodity contracts
$ 3,719
13
Total
December 31, 2016
Derivatives designated as hedges
Fixed-to-floating interest rate swaps $ 3,765
Forward starting floating-to-fixed
interest rate swaps
Currency exchange contracts
802
450
Total
Derivatives not designated as hedges
Currency exchange contracts
Commodity contracts
$ 5,333
10
Total
1
7
8
$
$
41
7
48
39
1
40
$
$
$
$
— $
22
22
$
19
—
19
6 months to 17
years
Fair value
17
2 Cash flow 1 to 36 months
19
1 to 12 months
1 to 12 months
1
$
65
$
— $
8
Fair value
3 months to 18
years
—
11
12
31
2
33
19
1
85
$
—
22
22
85
—
85
$
$
$
1 Cash flow
11 years
17 Cash flow 1 to 36 months
26
$
1 to 12 months
1 to 12 months
$
$
$
$
$
$
$
$
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts
entered into to manage 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 currency exchange contracts.
58
The impact of derivative instruments to the Consolidated Statements of Income and Comprehensive Income follow:
Gain (loss) recognized in
other comprehensive
(loss) income
2017
2016
Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss
Gain (loss) reclassified
from Accumulated other
comprehensive loss
2017
2016
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest
rate swaps
Interest rate locks
Currency exchange contracts
Total
$
$
(15) $
(9)
—
(24) $
18
Interest expense - net
$
— Interest expense - net
(39) Cost of products sold
(21)
$
— $
—
(17)
(17) $
—
—
(8)
(8)
Amounts recognized in net income follow:
Derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Related long-term debt converted to floating interest
rates by interest rate swaps
Gains and losses described above were recognized in Interest expense - net.
Note 14. ACCOUNTS RECEIVABLE AND INVENTORY
Accounts Receivable
2017
2016
$
$
(33) $
(36)
33
— $
36
—
Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses.
The Company evaluates the collectability of its accounts receivable based on the length of time the receivable is past due and
any anticipated future write-off based on historic experience. Accounts receivable balances are written off against an allowance
for doubtful accounts after a final determination of uncollectability has been made. Accounts receivable are net of an allowance
for doubtful accounts of $57 and $50 at December 31, 2017 and 2016.
Inventory
Inventory is carried at lower of cost or net realizable value. During the fourth quarter of 2017, the Company changed its
method of accounting for certain inventory in the United States from the LIFO method to the FIFO method. The FIFO method
of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of
accounting and improves comparability with the Company's peers. Cost components include raw materials, purchased
components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs,
inspection costs, warehousing costs, and costs of the distribution network.
The components of inventory follow:
Raw materials
Work-in-process
Finished goods
Total inventory
2017
2016
As adjusted
$
$
$
953
471
1,196
2,620
$
879
395
1,072
2,346
All prior periods presented in the financial statements have been retrospectively adjusted to apply the new method of FIFO
accounting for certain U.S. inventory. The cumulative effect of this change on periods prior to those presented herein resulted
in an increase in Retained earnings of $70 as of January 1, 2015. The Tax Cuts and Jobs Act ("TCJA"), which was signed into
law on December 22, 2017, would have required $14 of additional tax expense to adjust the deferred tax asset related to the
LIFO reserve to the new tax rate if inventories continued to be computed under the LIFO method. The change from the LIFO
method to the FIFO method eliminated the need to record this $14 of additional tax expense.
59
As a result of the retrospective application of this change in accounting method, the following financial statement line items
within the accompanying financial statements were adjusted, as follows:
December 31, 2017
December 31, 2016
December 31, 2015
As
computed
under
LIFO
As
reported
under
FIFO
Effect of
change
TCJA Other
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
$ 13,770
$ 13,756
$ — $ (14) $ 13,400
$ 13,409
$
9
$ 14,292
$ 14,304
$
12
3,354
391
2,963
3,368
382
2,986
—
(14)
14
14
5
9
2,127
202
1,925
2,118
199
1,919
(9)
(3)
(6)
2,145
164
1,981
2,133
159
1,974
(12)
(5)
(7)
$
2,962
$ 2,985
$ 14
$
9
$
1,922
$ 1,916
$
(6) $
1,979
$ 1,972
$
(7)
$
$
6.63
6.66
$
$
6.68
6.71
$ 0.03
$ 0.03
$ 0.02
$ 0.02
$
$
4.21
4.22
$
$
4.20
4.21
$ (0.01) $
$ (0.01) $
4.23
4.25
$
$
4.22
4.23
$ (0.01)
$ (0.02)
$
2,963
$ 2,986
$ 14
$
9
$
1,925
$ 1,919
$
(6) $
1,981
$ 1,974
$
(7)
2,962
2,985
14
9
1,922
1,916
(6)
1,979
1,972
(7)
$
4,006
$ 4,029
$ 14
$
9
$
1,337
$ 1,331
$
(6) $
1,015
$ 1,008
$
(7)
December 31, 2017
December 31, 2016
December 31, 2015
As
computed
under
LIFO
As
reported
under
FIFO
Effect of
change
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
$
2,514
$ 2,620
$
106
$
2,254
$ 2,346
$
92
253
253
512
8,589
538
$ 8,669
$
—
26
80
321
7,498
321
$ 7,555
$
360
325
(35)
—
57
(6) $
(3)
9
$
$
$
$
1,981
(100)
(20) $
$ 1,974
(105)
$
(8) $
(7)
(5)
12
(In millions except for per share
data)
Consolidated Statements
of Income
Cost of products sold
Income before income
taxes
Income tax expense
Net income
Net income attributable
to Eaton ordinary
shareholders
Net income per ordinary
share
Diluted
Basic
Consolidated Statements
of Comprehensive
Income
Net income
Net income attributable
to Eaton ordinary
shareholders
Total comprehensive
income attributable to
Eaton ordinary
shareholders
(In millions except for per share
data)
Consolidated Balance
Sheets
Inventory
Deferred income taxes -
noncurrent asset
Deferred income taxes -
noncurrent liability
Retained earnings
Consolidated Statements
of Cash Flows
Net income
Deferred income taxes
Inventory
$
$
$
2,963
(197)
(188) $
$ 2,986
(206)
(202) $
$
$
23
(9)
(14) $
1,925
(80)
25
$ 1,919
(83)
34
$
60
As a result of the retrospective application of this change in accounting principle, the following financial statement line
items within the unaudited interim 2017 and 2016 quarterly condensed consolidated financial statements were adjusted, as
follows:
(unaudited)
March 30, 2017
Three months ended
June 30, 2017
September 30, 2017
(In millions except for per share
data)
Consolidated Statements
of Income
Cost of products sold
Income before income
taxes
Income tax expense
Net income
Net income attributable to
Eaton ordinary
shareholders
Net income per ordinary
share
Diluted
Basic
(unaudited)
(In millions except for per share
data)
Consolidated Statements
of Income
Cost of products sold
Income before income
taxes
Income tax expense
Net income
Net income attributable to
Eaton ordinary
shareholders
Net income per ordinary
share
Diluted
Basic
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
$
3,310
$ 3,307
$
(3) $
3,450
$ 3,448
$
(2) $
3,469
$ 3,466
$
(3)
464
32
432
467
33
434
3
1
2
570
54
516
572
55
517
2
1
1
1,691
292
1,399
1,694
293
1,401
$
432
$
434
$
2
$
515
$
516
$
1
$
1,399
$ 1,401
$
3
1
2
2
$
$
0.96
0.96
$
$
0.96
0.97
$ — $
$
$ 0.01
1.15
1.15
$
$
1.15
1.16
$ — $
$
$ 0.01
3.14
3.16
$
$
3.14
3.16
$ —
$ —
March 30, 2016
Three months ended
June 30, 2016
September 30, 2016
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
As
originally
reported
As
adjusted
Effect
of
change
$
3,291
$ 3,294
$
3
$
3,419
$ 3,422
$
3
$
3,371
$ 3,374
$
3
442
39
403
439
38
401
(3)
(1)
(2)
553
61
492
550
60
490
(3)
(1)
(2)
573
51
522
570
50
520
(3)
(1)
(2)
$
404
$
402
$
(2) $
491
$
489
$
(2) $
523
$
521
$
(2)
$
$
0.88
0.88
$
$
0.87
0.88
$ (0.01) $
$ — $
1.07
1.08
$
$
1.07
1.07
$ — $
$ (0.01) $
1.15
1.15
$
$
1.14
1.15
$ (0.01)
$ —
61
Note 15. BUSINESS SEGMENT AND GEOGRAPHIC REGION 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 segments are as follows:
Electrical Products and Electrical Systems and Services
The Electrical Products segment consists of electrical components, industrial components, residential products, single phase
power quality, emergency lighting, fire detection, wiring devices, structural support systems, circuit protection, and lighting
products. The Electrical Systems and Services segment consists of power distribution and assemblies, three phase power
quality, hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation, utility power distribution,
power reliability equipment, and services. The principal markets for these segments are industrial, institutional, governmental,
utility, commercial, residential and information technology. These products are used wherever there is a demand for electrical
power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories, utilities, and
industrial and energy facilities. The segments share several common global customers, but a large number of customers are
located regionally. Sales are made directly to original equipment manufacturers, utilities, and certain other end users, as well as
through distributors, resellers, and manufacturers' representatives.
Hydraulics
The Hydraulics segment is a global leader in hydraulics components, systems and services for industrial and mobile
equipment. Eaton offers a wide range of power products including pumps, motors and hydraulic power units; a broad range of
controls and sensing products including valves, cylinders and electronic controls; a full range of fluid conveyance products
including industrial and hydraulic hose, fittings, and assemblies, thermoplastic hose and tubing, couplings, connectors, and
assembly equipment; filtration systems solutions; industrial drum and disc brakes; and golf grips. The principal markets for the
Hydraulics segment include renewable energy, marine, agriculture, oil and gas, construction, mining, forestry, utility, material
handling, truck and bus, machine tools, molding, primary metals, and power generation. Key manufacturing customers in these
markets and other customers are located globally. Products are sold and serviced through a variety of channels.
Aerospace
The Aerospace segment is a leading global supplier of aerospace fuel, hydraulics, and pneumatic systems for commercial
and military use. Products include hydraulic power generation systems for aerospace applications including pumps, motors,
hydraulic power units, hose and fittings, electro-hydraulic pumps; controls and sensing products including valves, cylinders,
electronic controls, electromechanical actuators, sensors, aircraft flap and slat systems and nose wheel steering systems; fluid
conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing and ducting; and fuel systems
including fuel pumps, sensors, valves, adapters and regulators. The principal markets for the Aerospace segment are
manufacturers of commercial and military aircraft and related after-market customers. These manufacturers and other
customers operate globally. Products are sold and serviced through a variety of channels.
Vehicle
The Vehicle segment is a leader in the design, manufacture, marketing, and supply of: drivetrain, powertrain systems and
critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks and
commercial vehicles. Products include transmissions, clutches, hybrid power systems, superchargers, engine valves and valve
actuation systems, cylinder heads, locking and limited slip differentials, transmission controls, fuel vapor components, fluid
connectors and conveyance products for the global vehicle industry. The principal markets for the Vehicle segment are original
equipment manufacturers and aftermarket customers of heavy-, medium-, and light-duty trucks, SUVs, CUVs, passenger cars
and agricultural equipment.
Other Information
No single customer represented greater than 10% of net sales in 2017, 2016 or 2015, respectively.
The accounting policies of the business segments are generally the same as the policies described in Note 1, except that
operating profit only reflects the service cost component related to pensions and other postretirement benefits. Intersegment
sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties. These
intersegment sales are eliminated in consolidation. Operating profit includes the operating profit from intersegment sales.
62
For purposes of business segment performance measurement, the Company does not allocate items that are of a non-
operating nature or are of a corporate or functional governance nature. Corporate expenses consist of transaction costs
associated with the acquisition of certain businesses and corporate office expenses including compensation, benefits,
occupancy, depreciation, and other administrative costs. Identifiable assets of the business segments exclude goodwill, other
intangible assets, and general corporate assets, which principally consist of certain cash, short-term investments, deferred
income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.
Business Segment Information
Net sales
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
Total net sales
Segment operating profit
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
2017
2016
2015
$
7,193
$
6,957
$
5,666
2,468
1,744
3,333
5,662
2,222
1,753
3,153
6,976
5,931
2,459
1,807
3,682
$
$
20,404
$
19,747
$
20,855
1,287
$
1,240
$
1,156
770
288
332
537
711
198
335
474
776
246
310
645
Total segment operating profit
3,214
2,958
3,133
Corporate
Amortization of intangible assets
Interest expense - net
Pension and other postretirement benefits expense
Gain on sale of business
Other corporate expense - net*
Income before income taxes*
Income tax expense*
Net income*
Less net income for noncontrolling interests
Net income attributable to Eaton ordinary shareholders*
$
(388)
(246)
(45)
1,077
(244)
3,368
382
2,986
(1)
2,985
$
(392)
(233)
(60)
—
(155)
2,118
199
1,919
(3)
1,916
$
(406)
(232)
(130)
—
(232)
2,133
159
1,974
(2)
1,972
*Other corporate expense - net and Income tax expense in 2016 and 2015 have been adjusted to reflect the change in inventory accounting
method, as described in Notes 1 and 14.
Business segment operating profit was reduced by acquisition integration charges as follows:
Electrical Products
Electrical Systems and Services
Hydraulics
Total
2017
2016
2015
$
$
4
—
—
4
$
$
3
1
—
4
$
$
25
15
2
42
Corporate acquisition integration charges totaled $5 in 2015, and are included above in Other corporate expense - net. There
was no corporate acquisition integration charges in 2017 and 2016. See Note 3 for additional information about acquisition
integration charges.
63
Identifiable assets
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
Total identifiable assets
Goodwill
Other intangible assets
Corporate*
Total assets*
2017
2016
2015
$
2,570
$
2,363
$
2,141
1,345
938
2,379
9,373
13,568
5,265
4,417
2,222
1,188
830
1,549
8,152
13,201
5,514
3,609
2,538
2,285
1,138
841
1,579
8,381
13,479
6,014
3,185
$
32,623
$
30,476
$
31,059
*Corporate identifiable assets in 2016 and 2015 have been adjusted to reflect the change in inventory accounting method, as described in
Notes 1 and 14.
Capital expenditures for property, plant and equipment
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
Total
Corporate
Total expenditures for property, plant and equipment
Depreciation of property, plant and equipment
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
Total
Corporate
$
134
$
134
$
83
96
37
141
491
29
78
92
28
142
474
23
$
$
520
$
497
$
143
$
141
$
83
61
26
109
422
54
82
64
27
109
423
63
Total depreciation of property, plant and equipment
$
476
$
486
$
137
94
61
33
119
444
62
506
137
82
67
28
113
427
52
479
64
Geographic Region Information
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and
equipment - net.
Net sales
United States
Canada
Latin America
Europe
Asia Pacific
Total
Long-lived assets
United States
Canada
Latin America
Europe
Asia Pacific
Total
2017
2016
2015
$
11,222
$
10,937
$
11,396
$
$
942
1,485
4,394
2,361
898
1,448
4,228
2,236
969
1,726
4,379
2,385
20,404
$
19,747
$
20,855
1,872
$
1,924
$
1,982
20
290
769
551
19
281
681
538
19
243
734
587
$
3,502
$
3,443
$
3,565
Note 16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Registered Senior Notes issued by Eaton Corporation are registered under the Securities Act of 1933. Eaton and certain
other of Eaton's 100% owned direct and indirect subsidiaries (the Guarantors) fully and unconditionally guaranteed (subject, in
the case of the Guarantors, other than Eaton, to customary release provisions as described below), on a joint and several basis,
the Registered Senior Notes. The following condensed consolidating financial statements are included so that separate financial
statements of Eaton, Eaton Corporation and each of the Guarantors are not required to be filed with the Securities and Exchange
Commission. The consolidating adjustments primarily relate to eliminations of investments in subsidiaries and intercompany
balances and transactions. The condensed consolidating financial statements present investments in subsidiaries using the
equity method of accounting. See Note 6 for additional information related to the Registered Senior Notes.
The guarantee of a Guarantor that is not a parent of the issuer will be automatically and unconditionally released and
discharged in the event of any sale of the Guarantor or of all or substantially all of its assets, or in connection with the release or
termination of the Guarantor as a guarantor under all other U.S. debt securities or U.S. syndicated credit facilities, subject to
limitations set forth in the indenture. The guarantee of a Guarantor that is a direct or indirect parent of the issuer will only be
automatically and unconditionally released and discharged in connection with the release or termination of such Guarantor as a
guarantor under all other debt securities or syndicated credit facilities (in both cases, U.S. or otherwise), subject to limitations
set forth in the indenture.
During 2017, 2016 and 2015, the Company undertook certain steps to restructure ownership of various subsidiaries. The
transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. This restructuring has been
reflected as of the beginning of the earliest period presented below.
Additionally, certain amounts in 2016 and 2015 have been adjusted to reflect the change in inventory accounting method, as
described in Notes 1 and 14.
65
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2017
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
6,659
$
6,563
$
12,599
$
(5,417) $
20,404
Cost of products sold
Selling and administrative expense
Research and development expense
Interest expense (income) - net
Gain on sale of business
Other expense (income) - net
Equity in loss (earnings) of
subsidiaries, net of tax
Intercompany expense (income) - net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less net loss (income) for
noncontrolling interests
Net income (loss) attributable to
Eaton ordinary shareholders
Other comprehensive income (loss)
Total comprehensive income
(loss) attributable to Eaton
ordinary shareholders
$
$
—
136
—
—
—
79
(3,644)
444
2,985
—
2,985
—
5,276
1,172
215
245
560
9
(1,139)
(561)
2,002
499
1,503
—
4,840
759
207
21
—
(70)
(4,958)
1,197
4,567
(232)
4,799
9,054
1,498
162
(21)
517
(56)
(4,665)
(1,080)
8,224
115
8,109
(5,414)
—
—
1
—
—
14,406
—
(14,410)
—
(14,410)
13,756
3,565
584
246
1,077
(38)
—
—
3,368
382
2,986
—
(3)
2
(1)
2,985
$
1,503
$
4,799
$
8,106
$
(14,408) $
2,985
1,044
41
1,064
2,192
(3,297)
1,044
4,029
$
1,544
$
5,863
$
10,298
$
(17,705) $
4,029
66
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2016
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
6,447
$
6,351
$
11,961
$
(5,012) $
19,747
Cost of products sold
Selling and administrative expense
Research and development expense
Interest expense (income) - net
Other expense (income) - net
Equity in loss (earnings) of
subsidiaries, net of tax
Intercompany expense (income) - net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less net loss (income) for
noncontrolling interests
Net income (loss) attributable to
Eaton ordinary shareholders
Other comprehensive income (loss)
Total comprehensive income
(loss) attributable to Eaton
ordinary shareholders
$
$
—
140
—
—
(35)
(2,433)
412
1,916
—
1,916
—
5,076
1,153
235
233
(48)
(770)
(122)
690
23
667
—
4,697
760
186
17
43
(3,266)
1,230
2,684
26
2,658
—
8,649
1,452
168
(16)
(67)
(2,808)
(1,520)
6,103
149
5,954
(5,013)
—
—
(1)
—
9,277
—
(9,275)
1
(9,276)
13,409
3,505
589
233
(107)
—
—
2,118
199
1,919
(5)
2
(3)
1,916
$
667
$
2,658
$
5,949
$
(9,274) $
1,916
(585)
54
(566)
(1,344)
1,856
(585)
1,331
$
721
$
2,092
$
4,605
$
(7,418) $
1,331
67
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2015
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
6,926
$
6,660
$
12,531
$
(5,262) $
20,855
Cost of products sold
Selling and administrative expense
Research and development expense
Interest expense (income) - net
Other expense (income) - net
Equity in loss (earnings) of
subsidiaries, net of tax
Intercompany expense (income) - net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Less net loss (income) for
noncontrolling interests
Net income (loss) attributable to
Eaton ordinary shareholders
Other comprehensive income (loss)
Total comprehensive income
(loss) attributable to Eaton
ordinary shareholders
$
$
—
141
—
—
—
(2,449)
336
1,972
—
1,972
—
5,518
1,223
266
222
—
(821)
(384)
902
87
815
—
5,041
738
197
21
24
(3,221)
1,218
2,642
(69)
2,711
8,978
1,494
162
(13)
(59)
(2,761)
(1,170)
5,900
152
5,748
(5,233)
—
—
2
—
9,252
—
(9,283)
(11)
(9,272)
14,304
3,596
625
232
(35)
—
—
2,133
159
1,974
—
(3)
1
(2)
1,972
$
815
$
2,711
$
5,745
$
(9,271) $
1,972
(964)
5
(951)
(2,000)
2,946
(964)
1,008
$
820
$
1,760
$
3,745
$
(6,325) $
1,008
68
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2017
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
$
$
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Intercompany accounts receivable
Inventory
Prepaid expenses and other
current assets
Total current assets
Property, plant and equipment - net
Other noncurrent assets
Goodwill
Other intangible assets
Deferred income taxes
Investment in subsidiaries
Intercompany loans receivable
Other assets
Total assets
Liabilities and shareholders’
equity
Current liabilities
Short-term debt
Current portion of long-term debt
Accounts payable
Intercompany accounts payable
Accrued compensation
Other current liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Pension liabilities
Other postretirement benefits
liabilities
Deferred income taxes
Intercompany loans payable
Other noncurrent liabilities
Total noncurrent liabilities
Shareholders’ equity
Eaton shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
— $
—
—
8
—
—
8
—
—
—
—
15,045
3,122
—
18,175
$
— $
—
—
4
—
1
5
—
—
—
—
917
—
917
183
—
482
2,865
473
229
4,232
835
1,307
138
356
15,439
7,104
748
30,159
$
$
— $
542
533
4,920
128
564
6,687
6,180
341
192
—
3,718
314
10,745
12
—
1,317
5,146
692
145
7,312
684
6,293
3,002
—
87,919
2,735
163
108,108
$
$
— $
35
313
4,405
63
308
5,124
976
83
94
558
68,405
272
70,388
$
$
$
366
534
2,144
2,741
1,537
277
7,599
1,983
5,968
2,125
221
39,527
61,225
787
119,435
6
1
1,320
1,431
262
1,000
4,020
8
802
76
304
1,146
379
2,715
— $
—
—
(10,760)
(82)
28
(10,814)
—
—
—
(324)
(157,930)
(74,186)
—
(243,254) $
— $
—
—
(10,760)
—
(1)
(10,761)
3
—
—
(324)
(74,186)
—
(74,507)
17,253
—
17,253
18,175
$
12,727
—
12,727
30,159
$
32,596
—
32,596
108,108
$
112,663
37
112,700
119,435
$
(157,986)
—
(157,986)
(243,254) $
561
534
3,943
—
2,620
679
8,337
3,502
13,568
5,265
253
—
—
1,698
32,623
6
578
2,166
—
453
1,872
5,075
7,167
1,226
362
538
—
965
10,258
17,253
37
17,290
32,623
69
CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2016
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
$
$
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Intercompany accounts receivable
Inventory
Prepaid expenses and other
current assets
Total current assets
Property, plant and equipment - net
Other noncurrent assets
Goodwill
Other intangible assets
Deferred income taxes
Investment in subsidiaries
Intercompany loans receivable
Other assets
Total assets
Liabilities and shareholders’
equity
Current liabilities
Short-term debt
Current portion of long-term debt
Accounts payable
Intercompany accounts payable
Accrued compensation
Other current liabilities
Total current liabilities
Noncurrent liabilities
Long-term debt
Pension liabilities
Other postretirement benefits
liabilities
Deferred income taxes
Intercompany loans payable
Other noncurrent liabilities
Total noncurrent liabilities
Shareholders’ equity
Eaton shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
$
1
—
—
5
—
—
6
—
—
—
—
32,852
—
—
32,858
$
$
— $
—
1
281
—
1
283
—
—
—
—
17,621
—
17,621
92
—
536
953
443
77
2,101
857
1,362
169
864
20,200
7,609
490
33,652
$
$
— $
1,250
412
3,332
98
590
5,682
5,767
610
198
—
3,768
326
10,669
$
$
$
5
—
1,049
4,239
638
42
5,973
706
6,293
3,442
15
92,766
2,061
134
111,390
8
296
252
3,130
58
276
4,020
936
161
99
732
44,788
212
46,928
$
$
$
445
203
1,975
3,382
1,344
237
7,586
1,880
5,546
1,903
218
44,345
56,938
336
118,752
6
6
1,053
1,836
223
957
4,081
8
888
71
361
431
396
2,155
— $
—
—
(8,579)
(79)
25
(8,633)
—
—
—
(772)
(190,163)
(66,608)
—
(266,176) $
— $
—
—
(8,579)
—
(2)
(8,581)
—
—
—
(772)
(66,608)
—
(67,380)
543
203
3,560
—
2,346
381
7,033
3,443
13,201
5,514
325
—
—
960
30,476
14
1,552
1,718
—
379
1,822
5,485
6,711
1,659
368
321
—
934
9,993
14,954
—
14,954
32,858
$
17,301
—
17,301
33,652
$
60,442
—
60,442
111,390
$
112,478
38
112,516
118,752
$
(190,221)
6
(190,215)
(266,176) $
14,954
44
14,998
30,476
70
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
DECEMBER 31, 2017
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
258
$
(498) $
(30) $
4,545
$
(1,609) $
2,666
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,
plant and equipment
Cash received from sales (paid for
acquisitions) of affiliates
Purchases of short-term investments
- net
Investments in affiliates
Return of investments in affiliates
Loans to affiliates
Repayments of loans from affiliates
Proceeds from sale of business
Other - net
Net cash provided by (used in)
investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Proceeds from borrowings from
affiliates
Payments on borrowings from
affiliates
Capital contributions from affiliates
Return of capital to affiliates
Other intercompany financing
activities
Cash dividends paid
Cash dividends paid to affiliates
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares
withheld
Other - net
Net cash provided by (used in)
financing activities
Effect of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
—
—
—
(190)
—
—
—
—
—
(190)
—
—
(90)
—
—
—
—
(444)
303
338
(45)
62
1,000
(1,250)
2,605
3,130
(822)
(2,904)
—
—
—
(1,068)
—
66
(850)
—
—
(69)
—
(1)
1
—
—
573
—
—
—
—
(14)
(8)
527
—
91
92
(520)
—
(298)
—
—
—
—
607
(6)
(217)
1,000
(1,554)
—
—
—
—
—
(1,068)
—
66
(850)
(22)
(14)
(110)
(92)
—
—
90
—
46
—
9
(320)
92
(298)
(90)
—
(6,723)
3,817
269
30
—
—
—
280
(90)
7,167
(4,166)
—
—
(57)
(3,223)
3,191
—
(297)
991
(353)
90
—
469
—
(800)
—
—
(5)
(1)
94
—
7
5
—
(7)
441
(87)
190
(90)
(1,042)
—
(809)
—
—
(3)
(5)
—
—
(7,167)
4,166
(280)
90
—
—
1,609
—
—
—
—
(1,412)
(1,582)
(2,442)
11
(79)
445
366
—
—
—
$
— $
11
18
543
561
Cash at the end of the period
$
— $
183
$
12
$
71
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
DECEMBER 31, 2016
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
(253) $
22
$
(232) $
3,033
$
— $
2,570
(798)
(3,985)
4,563
(529)
—
—
—
(1,250)
—
—
—
—
(1,250)
—
—
(92)
(114)
—
—
—
—
(251)
1,293
(9)
941
21
(408)
1
2
(120)
47
(655)
—
41
610
(233)
3,843
4,045
1,120
(646)
(4,712)
—
—
—
(1,037)
74
(730)
—
—
—
—
168
—
—
—
(12)
1
(1,844)
1,370
—
12
—
—
—
(3)
(4)
(291)
—
(42)
(1,370)
—
(8,208)
5,951
(25)
—
—
—
2,740
(47)
9,114
(7,244)
—
(497)
1
(40)
—
—
—
—
7
—
(12)
106
(42)
1,370
(47)
(180)
—
—
—
(3)
(2)
—
—
(9,114)
7,244
(2,740)
47
—
—
—
—
—
—
631
(653)
—
—
—
—
—
(1,037)
74
(730)
(18)
(5)
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,
plant and equipment
Cash received from acquisitions of
businesses, net of cash acquired
Sales (purchases) of short-term
investments - net
Investments in affiliates
Return of investments in affiliates
Loans to affiliates
Repayments of loans from affiliates
Other - net
Net cash provided by (used in)
investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Proceeds from borrowings from
affiliates
Payments on borrowings from
affiliates
Capital contribution from affiliates
Return of capital to affiliates
Other intercompany financing
activities
Cash dividends paid
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares
withheld
Other - net
Net cash provided by (used in)
financing activities
1,504
(897)
1,028
1,190
(4,563)
(1,738)
Effect of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
$
—
1
—
1
$
—
66
26
92
$
—
(2)
7
5
$
(28)
210
235
445
—
—
—
$
— $
(28)
275
268
543
72
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
DECEMBER 31, 2015
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
(137) $
(195) $
(281) $
3,026
$
(4) $
2,409
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,
plant and equipment
Cash paid for acquisitions of
businesses, net of cash acquired
Sales (purchases) of short-term
investments - net
Investments in affiliates
Loans to affiliates
Repayments of loans from affiliates
Proceeds from the sales of
businesses
Other - net
Net cash provided by (used in)
investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Proceeds from borrowings from
affiliates
Payments on borrowings from
affiliates
Capital contribution from affiliates
Other intercompany financing
activities
Cash dividends paid
Cash dividends paid to affiliates
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares
withheld
Other - net
Net cash provided by (used in)
financing activities
Effect of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
(94)
(146)
(266)
—
—
—
(1,482)
—
—
—
—
(1,482)
—
—
3,322
(48)
—
—
(1,026)
—
52
(682)
—
—
1,618
—
(1)
1
—
—
—
(889)
342
—
(50)
(691)
408
(724)
6,885
(6,467)
1,176
(518)
—
—
—
—
(26)
1
735
—
(151)
177
(36)
(2)
(1,176)
(39)
359
—
47
(36)
39
(1,482)
(10,608)
7,493
1
(32)
—
—
—
4,140
11,536
(8,194)
—
—
(993)
(4,891)
7,482
—
(301)
997
(1,282)
1,482
378
—
—
—
—
(6)
—
17
(2)
332
(397)
1,482
140
—
(4)
—
—
(6)
(10)
—
—
(11,536)
8,194
(4,140)
—
—
4
—
—
—
—
(506)
(72)
37
—
—
—
1
(35)
(575)
425
(1,027)
—
—
—
—
(1,026)
—
52
(682)
(38)
(9)
1,268
1,552
(7,478)
(2,305)
—
(6)
13
7
$
(42)
(355)
590
235
—
—
—
$
— $
(42)
(513)
781
268
Cash at the end of the period
$
— $
26
$
73
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).
COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is a power management company with 2017 net sales of $20.4 billion. The
Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical
power more efficiently, safely and sustainably. Eaton has approximately 96,000 employees in 59 countries and sells products to
customers in more than 175 countries.
Summary of Results of Operations
During 2017, the Company's results of operations returned to solid growth as global end markets expanded, particularly in
the second half of 2017. During the year, the Company completed its multi-year restructuring program that reduced its cost
structure, which expanded operating margins.
On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated
transmission business for $600 in cash to Cummins, Inc. The Company recognized a pre-tax gain of $1,077, of which $533
related to the pre-tax gain from the $600 proceeds from the sale and $544 related to the Company’s remaining 50% investment
in the joint venture being remeasured to fair value. The after-tax gain was $843. Eaton accounts for its investment on the equity
method of accounting.
The tax rate for 2017 includes a tax benefit of $62 related to the United States Tax Cuts and Jobs Act (“TCJA”), which was
signed into law on December 22, 2017. The tax benefit of $62 related to the TCJA is comprised of a tax benefit of $79 for
adjusting deferred tax assets and liabilities, offset by a tax expense of $17 for the taxation of unremitted earnings of non-U.S.
subsidiaries owned directly or indirectly by U.S. subsidiaries of Eaton.
During 2016, the Company's results of operations were impacted by a decline in several of the Company's end markets.
Further, the results of operations were negatively impacted by the strengthening in the value of the U.S. dollar. Despite the
declining market conditions and unfavorable impact of currency translation, the Company generated solid operating margins
and diluted net income per share.
During 2015, Eaton announced a multi-year restructuring initiative to reduce its cost structure and gain efficiencies in all
business segments and at corporate in order to respond to declining market conditions. Restructuring charges in 2017, 2016 and
2015 were $116, $211 and $129, respectively. These charges were primarily comprised of severance costs. The initiative
concluded at the end of 2017 and the projected annualized savings from these restructuring actions are expected to be $518,
when fully realized in 2018.
Additional information related to acquisitions and divestitures of businesses, and restructuring activities is presented in Note
2, Note 3, and Note 4, respectively, of the Notes to the Consolidated Financial Statements.
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share
attributable to Eaton ordinary shareholders - diluted follows:
Net sales
Net income attributable to Eaton ordinary shareholders
Net income per share attributable to Eaton ordinary shareholders - diluted
2017
2016*
2015*
$
$
20,404
2,985
6.68
$
$
19,747
1,916
4.20
$
$
20,855
1,972
4.22
* Years ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
74
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain
non-GAAP financial measures. These financial measures include adjusted earnings, adjusted earnings per ordinary share, and
operating profit before acquisition integration charges for each business segment as well as corporate, each of which differs
from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A
reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is
included in the table below. Operating profit before acquisition integration charges is reconciled in the discussion of the
operating results of each business segment, and excludes acquisition integration expense related to integration of Ephesus
Lighting, Inc. in 2017 and 2016, Oxalis Group Ltd. in 2016, and primarily Cooper Industries plc in 2015. Management believes
that these financial measures are useful to investors because they exclude certain transactions, 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. For additional information on acquisition integration charges, see
Note 3 to the Consolidated Financial Statements.
Consolidated Financial Results
Net sales
Gross profit
Percent of net sales
Income before income taxes
Net income
Less net income for noncontrolling interests
Net income attributable to Eaton ordinary shareholders
Excluding acquisition integration charges,
after-tax (Note 3)
2017
$ 20,404
6,648
32.6%
3,368
2,986
(1)
2,985
2
Change
from 2016
Change
from 2015
2016*
3% $ 19,747
6,338
5%
32.1%
2,118
59%
56%
56%
1,919
(3)
1,916
3
2015*
(5)% $ 20,855
6,551
(3)%
31.4%
2,133
(1)%
(3)%
(3)%
1,974
(2)
1,972
31
Adjusted earnings
$
2,987
56% $
1,919
(4)% $
2,003
Net income per share attributable to Eaton ordinary
shareholders - diluted
Excluding per share impact of acquisition integration
charges, after-tax (Note 3)
Adjusted earnings per ordinary share
$
$
6.68
—
6.68
59% $
4.20
— % $
4.22
59% $
0.01
4.21
(2)% $
0.07
4.29
* Year ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
Net Sales
Net sales in 2017 increased by 3% compared to 2016 due to an increase of 3% in organic sales. The increase in organic
sales in 2017 was primarily due to higher sales volumes in the Electrical Products, Hydraulics, and Vehicle business segments.
Net sales in 2016 decreased by 5% compared to 2015 due to a decrease of 4% in organic sales and decrease of 1% from the
impact of negative currency translation. The decrease in organic sales in 2016 was primarily due to weakening demand in
several of the Company's end markets.
Gross Profit
Gross profit margin increased from 32.1% in 2016 to 32.6% in 2017. The increase in gross profit margin in 2017 was
primarily due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by
commodity inflation. Gross profit increased from 31.4% in 2015 to 32.1% in 2016. The increase in gross profit margin in 2016
was primarily due to savings from restructuring actions and other cost control measures, partially offset by lower sales
volumes, unfavorable product mix, and higher restructuring charges.
75
Income Taxes
During 2017, an income tax expense of $382 was recognized (an effective tax rate of 11.3%) compared to income tax
expense of $199 in 2016 (an effective tax rate of 9.4%). The 2017 effective tax rate includes tax expense of $234 on the gain
from the sale of the business discussed in Note 2, and a tax benefit of $62 related to the TCJA. Excluding the gain and related
tax impact on the sale of business, and the impact of the TCJA, the tax rate for 2017 was expense of 9.2%. The decrease from
9.4% for the full year 2016 compared to 9.2% for the full year 2017 was due to the resolution of tax contingencies in various
tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of ASU
2016-09 as discussed in Note 1. During 2016, an income tax expense of $199 was recognized (an effective tax rate of 9.4%)
compared to income tax expense of $159 in 2015 (an effective tax rate of 7.5%). The 2016 effective tax rate increased from
2015 primarily due to greater levels of income earned in higher tax jurisdictions, partially offset by net decreases in worldwide
tax liabilities.
Net Income
Net income attributable to Eaton ordinary shareholders of $2,985 in 2017 increased 56% compared to $1,916 in 2016. Net
income in 2017 included $843 from the gain on the sale of the business discussed in Note 2, and $62 of income from the new
U.S. tax bill discussed in Note 9. Excluding these items, the increase in 2017 was primarily due to higher sales volumes,
savings from restructuring actions, and lower restructuring charges, partially offset by commodity inflation. Net income
attributable to Eaton ordinary shareholders of $1,916 in 2016 decreased 3% compared to Net income attributable to Eaton
ordinary shareholders of $1,972 in 2015. The decrease in 2016 was primarily due to lower sales volumes, unfavorable product
mix, and higher restructuring charges, partially offset by savings from restructuring actions, other cost control measures, a
decrease in pension and other post benefits expense, and income from several insurance matters during 2016.
Net income per ordinary share in 2017 included $1.89 from the gain on the sale of business discussed in Note 2 and $0.14
income from the new U.S. tax bill discussed in Note 9. Net income per ordinary share increased by 59% to $6.68 in 2017
compared to $4.20 in 2016. The increase was due to higher Net income attributable to Eaton ordinary shareholders and the
Company's share repurchases in 2017. Net income per ordinary share was broadly flat at $4.20 in 2016 compared to $4.22 in
2015 primarily due to a decrease in Net Income attributable to Eaton ordinary shareholders offset by the impact of the
Company's share repurchases in 2016.
Adjusted Earnings
Adjusted earnings of $2,987 in 2017 increased 56% compared to Adjusted earnings of $1,919 in 2016. The increase was
due to higher Net income attributable to Eaton ordinary shareholders. Adjusted earnings of $1,919 in 2016 decreased 4%
compared to 2015 Adjusted earnings of $2,003. The decrease was due to lower Net income attributable to Eaton ordinary
shareholders and lower acquisition integration charges.
Adjusted earnings per ordinary share increased by 59% to $6.68 in 2017 compared to $4.21 in 2016. The increase in
Adjusted earnings per ordinary share in 2017 was due to higher Adjusted earnings and the Company's share repurchases in
2017. Adjusted earnings per ordinary share of $4.21 in 2016 decreased 2% from $4.29 in 2015. The decrease in Adjusted
earnings per ordinary share in 2016 was due to lower Adjusted earnings, partially offset by the impact of the Company's share
repurchases in 2016.
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 acquisition integration charges see Note 3 to the Consolidated Financial Statements.
76
Electrical Products
Net sales
Operating profit
Operating margin
Acquisition integration charges
Before acquisition integration charges
Operating profit
Operating margin
2017
7,193
1,287
17.9%
Change
from 2016
2016
Change
from 2015
2015
3% $
6,957
— % $
6,976
4% $
1,240
17.8%
7 % $
1,156
16.6%
4
$
3
$
25
1,291
17.9%
4% $
1,243
17.9%
5 % $
1,181
16.9%
$
$
$
$
Net sales increased 3% in 2017 compared to 2016 due to an increase of 3% in organic sales. Organic sales growth in 2017
was driven by growth in the Americas and Europe. Net sales were broadly flat in 2016 compared to 2015 due to an increase of
1% in organic sales, offset by a decrease of 1% from the impact of negative currency translation. By region, organic sales grew
in 2016 in the Americas and Europe, while organic sales declined in Asia Pacific.
Operating margin increased from 17.8% in 2016 to 17.9% in 2017. The increase in operating margin in 2017 was primarily
due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by commodity
inflation and the impact from natural disasters in 2017. Operating margin increased from 16.6% in 2015 to 17.8% in 2016. The
increase in operating margin in 2016 was primarily due to savings from restructuring actions, other cost control measures, and
lower acquisition integration charges, partially offset by higher restructuring charges and unfavorable product mix.
Operating margin before acquisition integration charges was flat at 17.9% for 2016 and 2017. Operating margin before
acquisition integration charges increased from 16.9% in 2015 to 17.9% in 2016. The increase in operating margin before
acquisition integration charges in 2016 was primarily due to an increase in operating margin, partially offset by lower
acquisition integration charges.
Electrical Systems and Services
Net sales
Operating profit
Operating margin
Acquisition integration charges
Before acquisition integration charges
Operating profit
Operating margin
2017
5,666
Change
from 2016
2016
Change
from 2015
2015
—% $
5,662
(5)% $
5,931
770
13.6%
—
770
13.6%
8% $
711
12.6%
(8)% $
776
13.1%
$
1
$
15
8% $
712
12.6%
(10)% $
791
13.3%
$
$
$
$
Net sales were broadly flat in 2017 compared to 2016. Net sales decreased 5% in 2016 compared to 2015 due to a decrease
of 3% in organic sales and a decrease of 2% from the impact of negative currency translation. The organic sales decline in 2016
was primarily due to weakness in oil and gas markets and large industrial projects, partially offset by growth in data centers and
commercial construction markets.
Operating margin increased from 12.6% in 2016 to 13.6% in 2017. Operating margin increased in 2017 primarily due to
savings from restructuring actions and lower restructuring charges, partially offset by commodity inflation. Operating margin
decreased from 13.1% in 2015 to 12.6% in 2016. Operating margin decreased in 2016 primarily due to lower sales volumes,
unfavorable product mix, and higher restructuring charges, partially offset by savings from restructuring actions and other cost
control measures.
77
Operating margin before acquisition integration charges increased from 12.6% in 2016 to 13.6% in 2017. The increase in
operating margin before acquisition integration charges was primarily due to an increase in operating margin. Operating margin
before acquisition integration charges decreased from 13.3% in 2015 to 12.6% in 2016. The decrease in operating margin was
primarily due to lower operating margins and lower acquisition integration charges.
Hydraulics
Net sales
Operating profit
Operating margin
Acquisition integration charges
Before acquisition integration charges
Operating profit
Operating margin
2017
2,468
Change
from 2016
2016
Change
from 2015
2015
11% $
2,222
(10)% $
2,459
288
11.7%
—
288
11.7%
45% $
198
8.9%
(20)% $
246
10.0%
$
—
$
2
45% $
198
8.9%
(20)% $
248
10.1%
$
$
$
$
Net sales in 2017 increased 11% compared to 2016 due to an increase in organic sales of 12% and a decrease of 1% from
the impact of negative currency translation. The increase in organic sales in 2017 was due to strength in global mobile
equipment markets. Net sales in 2016 decreased 10% compared to 2015 due to a decrease in organic sales of 9% and a decrease
of 1% from the impact of negative currency translation. The decrease in organic sales was due to weakness in both the mobile
equipment and industrial markets.
Operating margin increased from 8.9% in 2016 to 11.7% in 2017. The increase in operating margin in 2017 was primarily
due to higher sales volumes, lower restructuring charges, and savings from restructuring actions, partially offset by commodity
inflation. Operating margin decreased from 10.0% in 2015 to 8.9% in 2016. The decrease in operating margin in 2016 was
primarily due to lower sales volumes and higher restructuring costs, partially offset by savings from restructuring actions and
other cost control measures.
Operating margin before acquisition integration charges decreased from 10.1% in 2015 to 8.9% in 2016. The decrease in
operating margin before acquisition integration charges was primarily due to lower operating margins.
Aerospace
Net sales
Operating profit
Operating margin
2017
1,744
Change
from 2016
2016
Change
from 2015
2015
— % $
1,753
(3)% $
1,807
332
19.0%
(1)% $
335
19.1%
8 % $
310
17.2%
$
$
Net sales were broadly flat in 2017 compared to 2016. Net sales in 2016 decreased 3% compared to 2015 due to a decrease
of 2% from the impact of negative currency translation and a decrease in organic sales of 1%. The decrease in organic sales
during 2016 was primarily due to a decrease in military OEM markets and lower cost reimbursements on certain engineering
programs, partially offset by growth in commercial markets.
Operating margin decreased from 19.1% in 2016 to 19.0% in 2017. The decrease was primarily due to higher program
development spending, partially offset by savings from restructuring actions. Operating margin increased from 17.2% in 2015
to 19.1% in 2016. The increase was primarily due to savings from restructuring actions, other cost control measures, and
reduced program development spending.
78
Vehicle
Net sales
Operating profit
Operating margin
2017
3,333
Change
from 2016
2016
Change
from 2015
2015
6% $
3,153
(14)% $
3,682
537
16.1%
13% $
474
15.0%
(27)% $
645
17.5%
$
$
Net sales increased 6% in 2017 compared to 2016 due to an increase in organic sales of 5% and an increase of 2% from the
impact of positive currency translation, partially offset by a decrease of 1% from the sale of the business discussed Note 2. The
increase in organic sales in 2017 was primarily due to growth in North America. Net sales decreased 14% in 2016 compared to
2015 due to a decrease in organic sales of 13% and a decrease of 1% from the impact of negative currency translation. The
decrease in organic sales in 2016 was primarily due to the lower North American Class 8 truck market.
Operating margin increased from 15.0% in 2016 to 16.1% in 2017. The increase in operating margin in 2017 was primarily
due to higher sales volumes, lower restructuring costs, and savings from restructuring actions, partially offset by commodity
inflation and unfavorable product mix. Operating margin decreased from 17.5% in 2015 to 15.0% in 2016. The decrease in
operating margin in 2016 was primarily due to lower sales volume and unfavorable product mix, partially offset by savings
from restructuring actions and other cost control measures.
Corporate Expense (Income)
Amortization of intangible assets
Interest expense - net
Pension and other postretirement benefits expense
Gain on sale of a business
Other corporate expense - net
Total corporate expense (income)
2017
Change
from 2016
2016*
Change
from 2015
2015*
$
$
388
246
45
(1,077)
244
(154)
(1)% $
6 %
(25)%
NM
57 %
(118)% $
392
233
60
—
155
840
(3)% $
— %
(54)%
NM
(33)%
(16)% $
406
232
130
—
232
1,000
* Year ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in
Notes 1 and 14 to the consolidated financial statements.
Corporate results were income of $154 in 2017 compared to expense of $840 in 2016. The change in Total corporate
expense (income) in 2017 was primarily due to the gain on the sale of the business discussed in Note 2, partially offset by an
increase in other corporate expense. Total corporate expense decreased 16% in 2016 to $840 from $1,000 in 2015 primarily due
to a decrease in pension and other postretirement benefits expense, and income from several insurance matters of $64 during
the fourth quarter of 2016. The decrease in pension and other postretirement benefits expense resulted from a change to the spot
rate approach for measuring service and interest costs, higher discount rates, and updated mortality tables.
79
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 a $2,000 commercial paper program. On November 17, 2017, Eaton refinanced a $500,
four-year revolving credit facility with a $500, three-year revolving credit facility that will expire November 17, 2020 and also
refinanced a $750, five-year revolving credit facility with a $750, five-year revolving credit facility that will expire November
17, 2022. Eaton also maintains a $750, five-year revolving credit facility that will expire October 14, 2021. These refinancings
maintain long-term revolving credit facilities at a total of $2,000. The revolving credit facilities are used to support commercial
paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an
unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton's revolving credit facilities at
December 31, 2017 or 2016. The Company had available lines of credit of $741 from various banks primarily for the issuance
of letters of credit, of which there was $297 outstanding at December 31, 2017. 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 as well as scheduled payments of long-term debt.
On September 15, 2017, a subsidiary of Eaton issued senior notes (the Notes) with a face amount of $1,000. The Notes are
comprised of two tranches of $700 and $300 which mature in 2027 and 2047, respectively, with interest payable semi-annually
at a respective rate of 3.1% and 3.9%. The issuer received proceeds totaling $993 from the issuance, net of financing costs.
On September 20, 2016, a subsidiary of Eaton issued Euro denominated notes (Euro Notes) with a face value of €550 ($615
based on the September 20, 2016 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as
amended. The Euro Notes mature in 2024 with interest payable annually at a rate of 0.75%. After financing costs and discounts,
the issuer received proceeds totaling €544 ($609 based on the September 20, 2016 spot rate) from the issuance.
For additional information on financing transactions and debt, see Note 6 to the Consolidated Financial Statements.
Eaton’s credit facilities and indentures governing certain long-term debt contain various covenants, the violation of which
would limit or preclude the use of the credit facilities for future borrowings, or might accelerate the maturity of the related
outstanding borrowings covered by the indentures. At Eaton’s present credit rating level, the most restrictive financial covenant
provides that the ratio of secured debt (or lease payments due under a sale and leaseback transaction) to adjusted consolidated
net worth (or consolidated net tangible assets, in each case as defined in the relevant credit agreement or indenture) may not
exceed 10%. Eaton's actual ratios are substantially below the required threshold. In addition, Eaton is in compliance with each
of its debt covenants for all periods presented.
Sources and Uses of Cash
Operating Cash Flow
Net cash provided by operating activities was $2,666 in 2017, an increase of $96 compared to $2,570 in 2016. The increase
was driven by higher net income, and lower working capital balances compared to 2016, partially offset by higher pension
contributions, including $350 of voluntary contributions to Eaton's U.S. qualified pension plans.
Net cash provided by operating activities was $2,570 in 2016, an increase of $161 compared to $2,409 in 2015. The
increase was driven by lower pension contributions and lower working capital balances compared to 2015.
Investing Cash Flow
Net cash used in investing activities was $217 in 2017, a decrease in the use of cash of $312 compared to $529 in 2016. The
decrease in 2017 was primarily driven by proceeds of $600 from the sale of the business discussed in Note 2, partially offset by
purchases of short-term investments of $298 in 2017 compared to $40 in 2016. Capital expenditures were $520 in 2017
compared to $497 in 2016. Eaton expects approximately $575 in capital expenditures in 2018.
Net cash used in investing activities was $529 in 2016, a decrease in the use of cash of $46 compared to $575 in 2015. The
decrease in 2016 was primarily driven by no business acquisitions completed in 2016 and lower capital expenditures in 2016
compared to 2015, partially offset by purchases of short-term investments of $40 in 2016 compared to sales $37 in 2015.
Capital expenditures were $497 in 2016 compared to $506 in 2015.
80
Financing Cash Flow
Net cash used in financing activities was $2,442 in 2017, an increase in the use of cash of $704 compared to $1,738 in
2016. The increase in the use of cash was primarily due to higher payments on borrowings of $1,554 in 2017 compared to $653
in 2016 and higher share repurchases of $850 in 2017 compared to $730 in 2016, partially offset by higher proceeds from
borrowings of $1,000 in 2017 compared to $631 in 2016.
Net cash used in financing activities was $1,738 in 2016, a decrease in use of cash of $567 compared to $2,305 in 2015.
The decrease in the use of cash was primarily due to lower payments on borrowings of $653 in 2016 compared to $1,027 in
2015 and higher proceeds from borrowings of $631 in 2016 compared to $425 in 2015, partially offset by higher share
repurchases of $730 in 2016 compared to $682 in 2015.
Credit Ratings
Eaton's debt has been assigned the following credit ratings:
Credit Rating Agency (long- /short-term rating)
Standard & Poor's
Moody's
Fitch
Defined Benefits Plans
Pension Plans
Rating
A-/A-2
Baa1/P-2
BBB+/F2
Outlook
Negative outlook
Stable outlook
Stable outlook
During 2017, the fair value of plan assets in the Company’s employee pension plans increased $865 to $5,312 at
December 31, 2017. The increase in plan assets was primarily due to better than expected return on plan assets, the Company's
contributions to the pension plans, and the impact of positive currency translation. At December 31, 2017, the net unfunded
position of $1,048 in pension liabilities consisted of $279 in the U.S. qualified pension plans, $925 in plans that have no
minimum funding requirements, and $62 in all other plans that require minimum funding, partially offset by $218 in plans that
are overfunded.
Funding requirements are a major consideration in making contributions to Eaton’s pension plans. With respect to the
Company’s pension plans worldwide, the Company intends to contribute annually not less than the minimum required by
applicable law and regulations. In 2017, $473 was contributed to the pension plans. The Company anticipates making $112 of
contributions to certain pension plans during 2018. The funded status of the Company’s pension plans at the end of 2018, and
future contributions, will depend primarily on the actual return on assets during the year and the discount rate used to calculate
certain benefits at the end of the year. Depending on these factors, and the resulting funded status of the pension plans, the level
of future contributions could be materially higher or lower than in 2017.
Off-Balance Sheet Arrangements
Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the
ordinary course of business, the Company leases certain real properties and equipment, as described in Note 8 to the
Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United
States requires management to make certain estimates and assumptions that may involve the exercise of significant judgment.
For any estimate or assumption used, there may be other reasonable estimates or assumptions that could have been used.
However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is
unlikely that applying other such estimates and assumptions would have caused materially different amounts to have been
reported. Actual results may differ from these estimates.
81
Revenue Recognition
Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers
and title has transferred in accordance with shipping terms, the selling price is fixed and determinable and collectability is
reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist.
Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold.
Although the majority of the sales agreements contain standard terms and conditions, there are agreements that contain multiple
elements or non-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting,
including whether the deliverables specified in these agreements should be treated as separate units of accounting for
recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for
each element. For delivered elements, sales generally are recognized only when the delivered elements have standalone value
and there are no uncertainties regarding customer acceptance. Sales for service contracts generally are recognized as the
services are provided.
Eaton records reductions to revenue for customer and distributor incentives, primarily comprised of rebates, at the time of
the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis and projected market
conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels.
Impairment of Goodwill and Other Long-Lived Assets
Goodwill
Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Goodwill is
tested for impairment at the reporting unit level, which is equivalent to Eaton's operating segments and based on the net assets
for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment, as this represents
the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The
Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to
perform a qualitative analysis.
Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate
that it is more likely than not that the fair value of an operating segment is less than its carrying amount. Events or
circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market
considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the
reporting unit or sustained decrease in share price.
Goodwill impairment testing for 2017 was performed using a qualitative analysis, which is performed by assessing certain
trends and factors that require significant judgment, 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
are compared to, and based on, the assumptions used in the most recent quantitative assessment. The results of these qualitative
analyses did not indicate a need to perform a quantitative analysis.
Goodwill impairment testing for 2016 was performed using a quantitative analysis under which the fair value for each
reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an
estimated weighted-average cost of capital. The forecasted cash flows were based on the Company's long-term operating plan
and a terminal value was used to estimate the operating segment's cash flows beyond the period covered by the operating plan.
The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market
holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about
appropriate discount rates, perpetual growth rates and the timing of expected future cash flows of the respective reporting unit.
Sensitivity analyses were performed in order to assess the reasonableness of the assumptions and the resulting estimated fair
values.
Based on the qualitative analyses performed in 2017 and quantitative analysis performed in 2016, the fair values of Eaton's
reporting units continue to substantially exceed their respective carrying amounts.
Indefinite Life Intangible Assets
Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using
either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts.
Indefinite life intangible asset impairment testing for 2017 and 2016 was performed using a quantitative analysis. Determining
the fair value of these assets requires significant judgment and the Company uses a royalty relief methodology similar to that
employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability.
82
Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances
change that would indicate that it is more likely than not that the asset is impaired. Events or circumstances that may result in
an impairment review include changes in industry and market considerations, cost factors, financial performance, and other
relevant entity-specific events that could affect inputs used to determine the respective fair values of the indefinite-lived
intangible assets.
For 2017 and 2016, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
Other Long-Lived Assets
Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. Events or circumstances that may result in an impairment review include operations reporting
losses, a significant adverse change in the use of an asset, the planned disposal or sale of the asset, a significant adverse change
in the business climate or legal factors related to the asset, or a significant decrease in the estimated market value of an asset.
Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are
largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the
estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. In instances where
the carrying amount of the asset group exceeded the undiscounted cash flows, the fair value of the asset group would be
determined and an impairment loss would be recognized based on the amount by which the carrying value of the asset group
exceeds its fair value. Determining asset groups and underlying cash flows requires the use of significant judgment.
For additional information about goodwill and other intangible assets, see Note 5 to the Consolidated Financial Statements.
Recoverability of Deferred Income Tax Assets
Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine the income tax
provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations
in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities
that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and
income tax loss carryforwards and income tax credit carryforwards.
Management evaluates the realizability of deferred income tax assets for each jurisdiction in which it operates. If the
Company experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and
prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and
no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead
management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction
in a three-year period including the current and prior two years, management then considers a series of factors in the
determination of whether the deferred income tax assets can be realized. These factors include historical operating results,
known or planned operating developments, the period of time over which certain temporary differences will reverse,
consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in a particular country,
prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the
same assumptions as the Company’s goodwill and other impairment testing. After evaluation of these factors, if the deferred
income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management
would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the
amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would
establish a valuation allowance. For additional information about income taxes, see Note 9 to the Consolidated Financial
Statements.
Pension and Other Postretirement Benefits Plans
The measurement of liabilities related to pension plans and other postretirement benefits plans is based on assumptions
related to future events including interest rates, return on plan assets, rate of compensation increases, and health care cost trend
rates. Actual plan asset performance will either reduce or increase losses included in accumulated other comprehensive loss,
which ultimately affects net income.
The discount rate for United States plans was determined by discounting the expected future benefit payments using a
theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date and solving
for the single rate that generated the same benefit obligation. Only corporate bonds with a rating of Aa or higher by either
Moody’s or Standard & Poor's were included. Callable bonds that are not make-whole bonds and certain other non-comparable
bonds were eliminated. Finally, a subset of bonds was selected by grouping the universe of bonds by duration and retaining
50% of the bonds that had the highest yields.
83
The discount rates for non-United States plans were determined by region and are based on high quality long-term corporate
and government bonds. Consideration has been given to the duration of the liabilities in each plan when selecting the bonds to
be used in determining the discount rate.
In 2016, the Company adopted a change in the method it uses to estimate the service and interest cost components of net
periodic benefit cost for its defined benefit pension and other postretirement benefit plans. Prior to 2016, for the vast majority
of its plans, the service and interest cost components were estimated using a single weighted-average discount rate derived
from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, the Company
used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the
estimation of the service and interest components of benefit cost, resulting in a more precise measurement. This change does
not affect the measurement of total benefit obligations. The change was accounted for as a change in estimate and, accordingly,
was accounted for prospectively starting in 2016. The reductions in service cost and interest cost for 2016 associated with this
change in estimate were $3 and $42, respectively.
Key assumptions used to calculate pension and other postretirement benefits expense are adjusted at each year-end. A 1-
percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $46 effect on
pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $69 effect on
pension expense. A 1-percentage point change in the assumed rate of return on other postretirement benefits assets is estimated
to have approximately a $1 effect on other postretirement benefits expense. A 1-percentage point change in the discount rate is
estimated to have approximately a $3 effect on expense for other postretirement benefits plans.
Additional information related to changes in key assumptions used to recognize expense for other postretirement benefits
plans is found in Note 7 to the Consolidated Financial Statements.
Environmental Contingencies
As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number
of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially
responsible party under the United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites.
A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular
site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of
environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton
has estimated the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an
undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. At
December 31, 2017 and 2016, $120 and $124, respectively, was accrued for these costs.
Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum
it may be required to pay in connection with environmental matters is not reasonably possible to exceed the recorded liability
by an amount that would have a material effect on its financial position, results of operations or cash flows.
MARKET RISK DISCLOSURE
On a regular basis, Eaton monitors third-party depository institutions that hold its cash and short-term investments,
primarily for safety of principal and secondarily for maximizing yield on those funds. The Company diversifies its cash and
short-term investments among counterparties to minimize exposure to any one of these entities. Eaton also monitors the
creditworthiness of its customers and suppliers to mitigate any adverse impact.
Eaton uses derivative instruments to manage exposure to volatility in raw material costs, currency, and interest rates on
certain debt instruments. Derivative financial instruments used by the Company are straightforward and non-leveraged. 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. See Note 13 to
the Consolidated Financial Statements for additional information about hedges and derivative financial instruments.
Eaton’s ability to access the commercial paper market, and the related cost of these borrowings, is based on the strength of
its credit rating and overall market conditions. The Company has not experienced any material limitations in its ability to access
these sources of liquidity. At December 31, 2017, Eaton had $2,000 of long-term revolving credit facilities with banks in
support of its commercial paper program. It has no borrowings outstanding under these credit facilities.
Interest rate risk can be measured by calculating the short-term earnings impact that would result from adverse changes in
interest rates. This exposure results from short-term debt, which includes commercial paper at a floating interest rate, long-term
debt that has been swapped to floating rates, and money market investments that have not been swapped to fixed rates. Based
upon the balances of investments and floating rate debt at year end 2017, a 100 basis-point increase in short-term interest rates
would have increased the Company’s net, pretax interest expense by $30.
84
Eaton also measures interest rate risk by estimating the net amount by which the fair value of the Company’s financial
liabilities would change as a result of movements in interest rates. Based on Eaton’s best estimate for a hypothetical, 100 basis
point decrease in interest rates at December 31, 2017, the market value of the Company’s debt and interest rate swap portfolio,
in aggregate, would increase by $537.
The Company is exposed to currency risk associated with translating its functional currency financial statements into its
reporting currency, which is the U.S. dollar. As a result, the Company is exposed to movements in the exchange rates of various
currencies against the U.S. dollar. Eaton also monitors exposure to transactions denominated in currencies other than the
functional currency of each country in which the Company operates, and regularly enters into forward contracts to mitigate that
exposure. In the aggregate, Eaton’s portfolio of forward contracts related to such transactions was not material to its
Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS
A summary of contractual obligations as of December 31, 2017 follows:
Long-term debt, including current portion(1)
Interest expense related to long-term debt
Reduction of interest expense from interest rate
swap agreements related to long-term debt
Operating leases
Purchase obligations
Other obligations
Total
2018
$
2019
to
2020
2021
to
2022
Thereafter
Total
$
578
284
$
581
497
$
2,003
453
$
4,549
1,965
(19)
159
958
155
(14)
204
93
9
(12)
105
9
8
(46)
71
4
23
7,711
3,199
(91)
539
1,064
195
$
2,115
$
1,370
$
2,566
$
6,566
$
12,617
(1) Long-term debt excludes deferred gains and losses on derivatives related to debt, adjustments to fair market value, and premiums and
discounts on long-term debentures.
Interest expense related to long-term debt is based on the fixed interest rate, or other applicable interest rate, related to the
debt instrument. The reduction of interest expense due to interest rate swap agreements related to long-term debt is based on the
difference in the fixed interest rate the Company receives from the swap, compared to the floating interest rate the Company
pays on the swap. Purchase obligations are entered into with various vendors in the normal course of business. These amounts
include commitments for purchases of raw materials, outstanding non-cancelable purchase orders, releases under blanket
purchase orders, and commitments under ongoing service arrangements. Other long-term obligations principally include
anticipated contributions of $112 to pension plans in 2018 and $45 of deferred compensation earned under various plans for
which the participants have elected to receive disbursement at a later date.
The table above does not include future expected pension benefit payments or expected other postretirement benefits
payments. Information related to the amounts of these future payments is described in Note 7 to the Consolidated Financial
Statements. The table above also excludes the liability for unrecognized income tax benefits, since the Company cannot predict
with reasonable certainty the timing of cash settlements with the respective taxing authorities. At December 31, 2017, the gross
liability for unrecognized income tax benefits totaled $735 and interest and penalties were $80.
85
FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains forward-looking statements concerning litigation and regulatory
developments, expected pension or other post-retirement benefit payments, and rates of return and expected future liquidity.
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; unanticipated changes 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; tax rate changes or exposure to additional income
tax liability; stock market and currency fluctuations; war, natural disasters, civil or political unrest or terrorism; 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.
86
QUARTERLY DATA (unaudited)
Quarter ended in 2017
Quarter ended in 2016
(In millions except for per share data)
Dec. 31
Sept. 30*
June 30* Mar. 31*
Dec. 31*
Sept. 30*
June 30* Mar. 31*
Net sales
Gross profit
$ 5,213
$
5,211
$ 5,132
$ 4,848
$ 4,867
$
4,987
$ 5,080
$ 4,813
1,678
1,745
1,684
1,541
1,548
1,613
1,658
1,519
Percent of net sales
32.2%
33.5%
32.8%
31.8%
31.8%
32.3%
32.6%
31.6%
Income before income taxes
Net income
Less net (income) loss for
noncontrolling interests
Net income attributable to Eaton
ordinary shareholders
Net income per share attributable to
Eaton ordinary shareholders
635
634
—
1,694
1,401
572
517
—
(1)
467
434
—
559
508
(4)
570
520
1
550
490
(1)
439
401
1
$
634
$
1,401
$
516
$
434
$
504
$
521
$
489
$
402
Diluted
Basic
$
1.43
$
1.44
3.14
3.16
$
1.15
1.16
$
0.96
0.97
$
1.12
1.12
$
1.14
1.15
$
1.07
1.07
$
0.87
0.88
Cash dividends declared per
ordinary share
Market price per ordinary share
$
0.60
$
0.60
$
0.60
$
0.60
$
0.57
$
0.57
$
0.57
$
0.57
High
Low
$ 82.34
$
81.63
$ 79.31
$ 74.63
$ 70.00
$
68.20
$ 63.98
$ 63.99
74.90
69.82
73.42
66.60
59.07
58.28
54.30
46.19
Earnings per share for the four quarters in a year may not equal full year earnings per share.
Acquisition integration charges included in Income before income taxes are as follows:
Quarter ended in 2017
Quarter ended in 2016
Dec. 31
Sept. 30
June 30
Mar. 31
Dec. 31
Sept. 30
June 30
Mar. 31
Acquisition integration charges
$
1
$
1
$
1
$
1
$
1
$
1
$
1
$
1
*Certain amounts have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as
described in Notes 1 and 14 to the consolidated financial statements.
FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY (unaudited)
(In millions except for per share data)
Net sales
Income before income taxes
Net income
Less net income for noncontrolling interests
2017
2016*
2015*
2014*
2013*
$20,404
$19,747
$20,855
$22,552
$22,046
3,368
2,986
2,118
1,919
2,133
1,974
1,762
1,804
1,870
1,864
(1)
(3)
(2)
(10)
(12)
Net income attributable to Eaton ordinary shareholders
$ 2,985
$ 1,916
$ 1,972
$ 1,794
$ 1,852
Net income per share attributable to Eaton ordinary shareholders
Diluted
Basic
Weighted-average number of ordinary shares outstanding
Diluted
Basic
Cash dividends declared
per ordinary share
Total assets
Long-term debt
Total debt
Eaton shareholders' equity
Eaton shareholders' equity
per ordinary share
Ordinary shares outstanding
$
6.68
$
4.20
$
4.22
$
3.76
$
3.88
6.71
4.21
4.23
3.78
3.91
447.0
444.5
456.5
455.0
467.1
465.5
476.8
474.1
476.7
473.5
$
2.40
$
2.28
$
2.20
$
1.96
$
1.68
$32,623
$30,476
$31,059
$33,557
$35,511
7,167
7,751
6,711
8,277
7,746
8,414
7,982
8,992
8,920
9,500
17,253
14,954
15,249
15,856
16,860
$ 39.22
$ 33.28
$ 33.24
$ 33.89
$ 35.49
439.9
449.4
458.8
467.9
475.1
*Certain amounts for the years 2013 through 2016 have been adjusted to reflect the retrospective application of the Company's change in
inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.
Eaton Corporation plc
2017 Annual Report on Form 10-K
Item 15(b)
Exhibit 31.1
Certification
I, Craig Arnold, certify that:
1.
I have reviewed this annual report on Form 10-K of Eaton Corporation plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 28, 2018
/s/ Craig Arnold
Craig Arnold
Principal Executive Officer
Eaton Corporation plc
2017 Annual Report on Form 10-K
Item 15(b)
Exhibit 31.2
Certification
I, Richard H. Fearon, certify that:
1.
I have reviewed this annual report on Form 10-K of Eaton Corporation plc;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in
all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: February 28, 2018
/s/ Richard H. Fearon
Richard H. Fearon
Principal Financial Officer
Eaton Corporation plc
2017 Annual Report on Form 10-K
Item 15(b)
Exhibit 32.1
Certification
This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies
Eaton Corporation plc’s Annual Report on Form 10-K for the year ended December 31, 2017 (“10-K Report”).
I hereby certify that, based on my knowledge, the Report on Form 10-K fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-K Report fairly
presents, in all material respects, the financial condition and results of operations of Eaton Corporation plc and its consolidated
subsidiaries.
Date: February 28, 2018
/s/ Craig Arnold
Craig Arnold
Principal Executive Officer
Eaton Corporation plc
2017 Annual Report on Form 10-K
Item 15(b)
Exhibit 32.2
Certification
This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies
Eaton Corporation plc’s Annual Report on Form 10-K for the year ended December 31, 2017 (“10-K Report”).
I hereby certify that, based on my knowledge, the Report on Form 10-K fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-K Report fairly
presents, in all material respects, the financial condition and results of operations of Eaton Corporation plc and its consolidated
subsidiaries.
Date: February 28, 2018
/s/ Richard H. Fearon
Richard H. Fearon
Principal Financial Officer
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Shareholder Information
This content was not included in our 10-K SEC filing.
Eaton Shareholder
Contact Information
Annual General Meeting
of Shareholders
Annual Report to Shareholders
Annual Certifications
Quarterly Financial Releases
Common Shares
Transfer Agent, Registrar,
Dividend Disbursement Agent
and Dividend Reinvestment
Agent
Dividend Reinvestment and
Direct Stock Purchase Plan
Investor Relations, Eaton, 1000 Eaton Boulevard, Cleveland, OH 44122 USA
+1 888.328.6647 +1 440.523.5000 www.eaton.com
The company’s 2018 Annual General Meeting of Shareholders will be held at 8:00 a.m., Dublin time, on
Wednesday, April 25, 2018, at Eaton House, 30 Pembroke Road, Dublin 4, Ireland. Formal notice of the
meeting will be made available on or about March 16, 2018, to each shareholder of record as of
February 26, 2018.
Most Eaton shareholders will not receive a mailed copy of the Proxy Statement and Annual Report to
Shareholders, but rather a notice that these materials are available online. Eaton shareholders who
currently receive paper copies, due to a prior election or due to participation in an employee benefit
plan, can register for electronic delivery of these materials as well as online proxy voting, at http://
enroll.icsdelivery.com/etn.
This 2017 Annual Report to Shareholders is available online at www.eaton.com/annualreport. Any
shareholder may obtain at no charge a printed copy of this Annual Report upon written request to the
address shown above. Other public financial reports also are available on Eaton's website at www.
eaton.com.
The most recent certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002
were filed as Exhibits 31.1,31.2, 32.1 and 32.2 to Eaton’s Annual Report on Form 10-K for 2017.
Additionally, Eaton submitted to the New York Stock Exchange its 2017 Chief Executive Officer
Certification regarding Eaton’s compliance with the corporate governance listing standards of the
Exchange.
Eaton’s financial results are available approximately four weeks after the end of each quarter.
Releases are available on Eaton’s website at www.eaton.com. Copies may also be obtained by
calling +1 440.523.4254.
Listed for trading: New York Stock Exchange (Ticker Symbol: ETN)
Computershare Inc.
First Class/Registered Mail: P.O. Box 30170, College Station, TX 77842-3170
Courier Packages: 211 Quality Circle, Suite 210, College Station, TX 77845
Toll-free: +1 888.597.8625 +1 312.588.4141 (outside the U.S.)
TDD: +1 800.952.9245 (hearing impaired inside the U.S.)
TDD: +1 781.575.4592 (hearing impaired outside the U.S.)
Computershare may also be contacted via its website at www.computershare.com/investor.
A dividend reinvestment plan is available at no charge to shareholders of record of Eaton Ordinary
Shares. Through the plan, shareholders of record may buy additional shares by reinvesting their cash
dividends or investing additional cash up to $60,000 per year. Also, new investors may buy Eaton
shares under this plan. Interested shareholders of record or new investors should contact
Computershare, as shown above.
Direct Deposit of Dividends
Shareholders of record may have their dividends directly deposited to their bank accounts.
Interested shareholders of record should contact Computershare, as shown above.
Forward-Looking Statements
This Annual Report to Shareholders, including the Chairman’s letter, contains forward-looking
statements concerning our five year goals and our corporate strategy, in addition to the forward-
looking statements made in the Form 10-K included in this Annual Report. These statements should
be used with caution and are subject to various risks and uncertainties, many of which are outside of
Eaton’s control. Please see the factors described in the paragraph under the heading “Forward-
Looking Statements” on page 86 of the Form 10-K included in this Annual Report to Shareholders for
a discussion of the factors that could cause actual results to differ materially from these forward-
looking statements.
This publication was printed at an FSC®-certified printer. The FSC Logo identifies products that
contain wood from well-managed forests certified in accordance with the rules of the Forest
Stewardship Council®. Soy-based inks and elemental chlorine-free, acid-free, recycled and
recyclable papers were employed throughout this publication.
Directors and Leadership Team
As of March 1, 2018
Directors, Eaton Corporation plc
Craig Arnold
Chairman, Eaton Corporation plc,
Dublin, Ireland
Todd M. Bluedorn 2*, 3
Chairman and Chief Executive Officer,
Lennox International Inc., Richardson,
Texas, a global provider of climate control
solutions for heating, air conditioning
and refrigeration markets
Christopher M. Connor 2, 3
Retired Chairman and Chief Executive
Officer, The Sherwin-Williams Company,
Cleveland, Ohio, a global manufacturer of
paint, architectural coatings, industrial
finishes and associated supplies
Michael J. Critelli 2, 4
Retired Chairman and Chief Executive
Officer, Pitney Bowes Inc., Stamford,
Connecticut, a global mailstream
solutions company
Richard H. Fearon
Vice Chairman and Chief Financial and
Planning Officer, Eaton Corporation
Charles E. Golden 2, 4
Retired Former Executive Vice President
and Chief Financial Officer and Director,
Eli Lilly and Company, Indianapolis, Indiana,
a pharmaceutical company
Sandra Pianalto 1, 3*
Retired Former President and Chief
Executive Officer of the Federal Reserve
Bank of Cleveland
Gerald B. Smith 1*,3
Chairman and Chief Executive Officer,
Smith, Graham & Company, Houston,
Texas, an investment advisory firm
Dorothy C. Thompson 1,3
Retired Chief Executive, Drax
Group plc, London, England, a
power generation company
Arthur E. Johnson 2, 4*
Retired Former Senior Vice President,
Corporate Strategic Development,
Lockheed Martin Corporation, Bethesda,
Maryland, a manufacturer of advanced
technology systems, products and services
Deborah L. McCoy 1, 4
Independent consultant. Former Senior
Vice President, Flight Operations,
Continental Airlines Inc., Houston, Texas,
a commercial airline
Gregory R. Page 1, 4
Retired Chairman and Chief Executive
Officer, Cargill Incorporated, Minneapolis,
Minnesota, an international marketer,
processor and distributor of agricultural,
food, financial and industrial products
and services
Board Committees
Each of the non-employee directors serves a four-month term on the Executive Committee. Craig Arnold serves as Committee Chair.
January 1, 2017 –
April 25, 2017
Charles E. Golden
Deborah L. McCoy
Gregory R. Page
Gerald B. Smith
April 26, 2017 –
Aug. 31, 2017
Todd M. Bluedorn
Michael J. Critelli
Sandra Pianalto
Sept. 1, 2017 –
Dec. 31, 2017
Christopher M. Connor
Arthur E. Johnson
Dorothy C. Thompson
Jan. 1, 2018 –
April 24, 2018
Charles E. Golden
Deborah L. McCoy
Gregory R. Page
Gerald B. Smith
1 Audit Committee
2 Compensation and Organization Committee
3 Finance Committee
4 Governance Committee
5 Executive Committee
* Denotes Committee Chair
Eaton Global Leadership Team
Craig Arnold
President and Chief Executive Officer
João V. Faria
President–Vehicle Group
Donald H. Bullock
Senior Vice President–Investor Relations
Richard H. Fearon
Vice Chairman and Chief Financial
and Planning Officer
Revathi Advaithi
Chief Operating Officer, Electrical Sector
Uday Yadav
Chief Operating Officer, Industrial Sector
Brian S. Brickhouse
President–Asia Pacific Region,
Electrical Sector
Curtis J. Hutchins
President–Hydraulics Group
Nanda Kumar
President–Aerospace Group
William J. VanLandingham
President–Electrical Systems
and Services Group
William W. Blausey Jr.
Senior Vice President and Chief
Information Officer
Frank C. Campbell
President –Europe, Middle East and Africa
Region, Corporate and Electrical Sector
Cynthia K. Brabander
Executive Vice President and Chief
Human Resources Officer
Mark Eubanks
President–Electrical Products Group
Rogerio Branco
Senior Vice President–Supply
Chain Management
Mary Kim Elkins
Senior Vice President –Taxes
Harold V. Jones
Executive Vice President –Eaton Business
System and Sustainability
John J. Matejka
Senior Vice President –Internal Audit
Trent M. Meyerhoefer
Senior Vice President –Treasury
Heath B. Monesmith
Executive Vice President
and General Counsel
Thomas E. Moran
Senior Vice President and Secretary
Ramanath I. Ramakrishnan
Executive Vice President and Chief
Technology Officer
Harpreet Saluja
Senior Vice President –Corporate
Development and Planning
Ken D. Semelsberger
Senior Vice President and Controller
Deborah R. Severs
Senior Vice President–Global
Ethics and Compliance
Taras G. Szmagala Jr.
Senior Vice President–Public
and Community Affairs and
Corporate Communications
EATON 2017 Annual Report 7
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