2018 Annual Report
We make what matters work.
At Eaton, we believe that power is
a fundamental part of just about
everything people do. Our innovative
technologies are helping customers
find new ways to manage electrical,
hydraulic and mechanical power more
efficiently, safely and sustainably.
We’re focused on making a difference
in the world – improving people’s
lives, the communities where we live
and work, and the planet our future
generations depend on. Because this
is what really matters. And we’re here
to make sure it works.
We make what matters work.
Eaton.com/WhatMatters
2018 Financial Highlights
NET SALES
(Billions of dollars)
$20.4
$21.6
$19.7
ADJUSTED EARNINGS
PER ORDINARY SHARE
(Dollars per share)1
$5.39
$4.65
$4.21
CASH FLOW
FROM OPERATIONS
(Billions of dollars)2
$3.0
$2.6
$2.7
NET-DEBT-TO-TOTAL-
CAPITAL RATIO
33.5%
30.5%
27.8%
2016
2017
2018
2016
2017
2018
2016
2017
2018
2016
2017
2018
(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 arbitration decision in 2018, and gain from
sale of a business and income from Tax Cuts and Jobs Act in 20171
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 arbitration decision in 2018,
and gain from sale of a business and income from Tax Cuts and Jobs Actin 20171
Weighted-average number of ordinary shares outstanding–diluted
Cash dividends declared per ordinary share
Total assets
Total debt
Eaton shareholders’ equity
COMPANY STOCK PERFORMANCE
2018
$21,609
2,145
–
$ 2,145
$ 2,351
$ 4.91
0.00
$ 4.91
$ 5.39
436.9
$ 2.64
$31,092
7,521
16,107
2017
$20,404
2,985
2
$ 2,987
$ 2,082
$ 6.68
0.00
$ 6.68
$ 4.65
447.0
$ 2.40
$32,623
7,751
17,253
2016
$19,747
1,916
3
$ 1,919
$ 1,919
$ 4.20
0.01
$ 4.21
$ 4.21
456.5
$ 2.28
$30,476
8,277
14,954
$300
$250
$200
$150
$100
$50
0
Eaton
S&P 500 Index
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
This 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 2018. The shareholder
returns reflected on the graph assume dividends were reinvested as of the ex-dividend date.
1. Adjusted earnings of $2,145 for 2018 were $2,351 excluding $206 from the after-tax expense for an arbitration decision related to the legacy Cooper Industries business acquired in 2012. Net
income and adjusted earnings per ordinary share of $4.91 for 2018 were $5.39 excluding $0.48 per share expense from the arbitration decision. 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. Operating cash flows of $2,658 for 2018 would have been $2,955 excluding the $297 payment made for the arbitration decision related to the legacy Cooper Industries business acquired in 2012.
2018 ANNUAL REPORT
3
To our shareholders
To our shareholders:
When I became CEO of Eaton a few years ago, one of our
first tasks was to decide the kind of company we wanted
Eaton to be and the legacy we would leave behind. We
began by modifying our vision. Today, the vision that guides
us is our commitment to improve quality of life and the
environment. It’s this emphasis on having a positive impact
on the world, combined with a clear understanding of our
responsibilities to shareholders, that propels our company
forward. We’re keeping our commitments, and we’re making
a difference for our customers, communities, shareholders,
and employees. In this report, you’ll see why I am so proud
of where we are today, and why I’m confident in our future.
Meeting our financial commitments
2018 was a good year for Eaton. We generated 6 percent
organic revenue growth, double the rate of the previous
year. We delivered strong segment operating margins of
16.8 percent, up 100 basis points over 2017. Our earnings
per share were $4.91, and excluding the impact of the
arbitration decision, earnings per share were $5.39. This
represents an increase of 16 percent over the prior year,
excluding the gain in 2017 from the creation of the Eaton
Cummins joint venture and 2017 income related to the U.S.
tax bill. In addition, we achieved strong cash flow, making it
possible to reinvest in our business and return $2.45 billion
to shareholders through a combination of share buybacks
and dividends.
Investing for the future
Last year, we also increased our focus on organic growth.
We invested in technology leadership, strengthened our
channel and created new strategic partnerships, and found
ways to deliver superior value for our customers. Here are a
few examples:
• Electrical: We enhanced our cybersecurity program
to provide our customers with increased protection
against cyber threats. We also earned UL cybersecurity
certifications for our labs in Pennsylvania and India – an
industry first. And, we expanded partnerships with
Microsoft, Cisco, EPRI, and Nissan as we continue to
create intelligent and connected solutions for customers.
• Aerospace: We began construction on our first aerospace
manufacturing facility in India, which will allow us to better
serve the growing Indian market. In addition, our Additive
Manufacturing Center of Excellence earned a quality
certification in 3D printing, enabling Eaton to supply 3D
printed metal components to civil and military aerospace
customers.
2018
4
EATON
Fortune names Eaton one of
the World’s Most Admired
Companies, recognizing
Eaton as an industry leader
for social responsibility.
Eaton receives ENERGY STAR
2018 Partner of the Year –
Sustained Excellence Award
demonstrating leadership in
energy efficiency.
Forbes names
Eaton one of
America’s Best
Employers in 2018.
• Hydraulics: We significantly expanded capacity at our
Turkish hydraulic hose plant to reduce customer lead
times, improve on-time delivery performance, and support
share growth. Our new mobile valve technology, which
provides unmatched precision and control in mobile
equipment applications, was recognized by the industry
as one of the most innovative advancements in the design
engineering space.
• Vehicle: We entered into a joint venture with Shaanxi Fast
Gear to develop, manufacture, sell, and service light-duty
manual transmissions. This will allow us to expand our
presence in the growing Asia-Pacific, Eastern Europe, and
Africa markets. In addition, we’ve expanded the use of our
automotive advanced valvetrain solutions into commercial
vehicle engine brakes and will start production with a
major Chinese engine manufacturer this year.
• eMobility: We are preparing to open our first eMobility
production plant in China, which will further enable us to
grow in the largest electric vehicle market in the world.
We are also investing in our future and have created a new
Center for Intelligent Power (CIP) in Dublin, Ireland. The CIP
is an important part of our global engineering organization
and is focused on developing new insights and business
models that are tied to our proprietary data.
Turning our aspirations into reality
Meeting our financial commitments and investing for
tomorrow’s growth are crucial, but we set our sights on
achieving more. We’re continuing to make Eaton a great
place to work, and the world a little better. Here’s more on
what we are doing to achieve our aspirational goals.
• We are making good on our commitment to be active
stewards of the environment. We’re pleased to report
that nearly 50 percent of our manufacturing facilities have
achieved “Zero Waste to Landfill” status. We now offer
106 Energy Star certified products that help customers
reduce their energy consumption and carbon footprint. We
were also pleased to be named again to the FTSE4Good
Index, which recognizes companies that demonstrate
strong environmental, social, and governance practices.
• We aspire to be a model of inclusion and diversity in our
industry – and here, too, we are making progress. Several
years ago, we established employee resource groups to
promote awareness, respect, and inclusion within the
workplace. Since that time, we’ve seen participation in
these groups increase significantly. Additionally, we were
recognized for the third straight year for our commitment
to LGBTQ+ equality by the Human Rights Campaign, and
as one of the best employers for diversity, new graduates,
and women by Forbes.
• We’re committed to the communities in which we live
and work. Eaton has a long tradition of community
involvement, and whether it’s refurbishing a local school in
Indonesia, supporting an orphanage in Brazil, or revitalizing
a neighborhood in Ohio, our employees are keeping that
tradition alive. In 2018, we also provided $12 million in
financial support to local community charitable activities.
Our strategy is working, and our future is promising
We’ve worked hard to transform Eaton into a new company–
a power management company with leading businesses
in their respective markets. As we look ahead to 2019, we
continue to believe we have the right strategy in place to
accelerate growth and deliver long-term value:
• We will maintain our focus on strategic growth initiatives
by developing technology leadership, growing our strategic
partnerships, and delivering superior value for our customers.
• We will continue to expand our margins by running our
business better. This will require that we create world-class
manufacturing facilities, deliver productivity improvements,
and enhance our portfolio of products and businesses.
• We will maintain our disciplined approach to allocating
capital – investing to win in all our businesses, returning
cash to shareholders through dividends and share
buybacks, and being financially disciplined in the mergers
and acquisitions market.
In closing
Our company is getting better, but we know our work is not
done. We will continue to be led by our vision – to improve
the quality of life and the environment. We are committed
to achieving our financial goals and creating a stronger and
more capable company. This will require that we excel at
serving the interests of our customers, our employees, our
communities, and our environment. And when we do these
things well, our shareholders will be rewarded. We’re looking
forward to the challenge.
On behalf of our employees and partners, thank you for your
confidence in Eaton.
Sincerely,
Craig Arnold
Chairman and Chief Executive Officer, Eaton
Human Rights Campaign awards
Eaton a perfect 100 percent
score on the 2018 Corporate
Equality Index, a national
benchmarking survey and report
on LGBTQ+ workplace equality.
Eaton and Microsoft
receive the 2018
Datacenter Dynamics’
Global Award for Mission
Critical Innovation.
Eaton
recognized as
FTSE4Good
Index Series
constituent.
2018 ANNUAL REPORT
5
A commitment to what matters
We believe the success of a company should be measured by more than financial results – it
should also be defined by its commitment to environmental stewardship, social responsibility
and governance – also known as ESG. At Eaton, these elements are at the heart of what our
company stands for. Our vision – to improve the quality of life and the environment through
the use of power management products and services – guides our everyday decisions and
actions, both big and small. While we’re proud of what we’ve been able to achieve so far, we
know our work is not done.
Reducing our environmental footprint
The foundation of our commitment to be a responsible global citizen is to operate efficiently and sustainably,
while producing products and services that allow our customers to do the same. We are proud to note that
nearly 50 percent of our manufacturing sites have achieved “Zero Waste to Landfill” status, and we are working
towards this goal at every Eaton manufacturing site. We have deployed solar power systems at many of our sites,
generating 9.2 million kilowatt hours of renewable electricity per year. We also reduced our greenhouse gas
emissions by 4.4 percent indexed to sales last year. And, we produce intelligent power management solutions,
energy storage systems and microgrids that help customers reduce their environmental impact and improve the
reliability of the electrical grid.
Strengthening our workforce and communities
We’re focused on creating an inclusive, safe and engaging workplace where every employee can make a
difference. We increased the number of Inclusion Employee Resource Groups last year and saw membership in
these groups grow to nearly 9,000 employees. We recognized 45 Eaton sites with exceptional safety performance
through our Safety STAR awards. And, through Eaton University, we offered more than 2,500 courses and videos
to support the professional development of our employees. We also care deeply about the communities where
we live and work: we encourage our employees to take an active role in local causes important to them, and
formally acknowledge the best among us through our annual Stover Award for Volunteerism. Last year, we
provided $12 million in financial support for those causes, as well.
Doing business right
Our commitment to “doing business right” begins at the highest levels of our leadership and is brought to life
each day through the actions of our employees. Our corporate governance policies establish a common set of
expectations and governance practices that guide senior management and the Board of Directors. We’re proud
of the fact that 50 percent of our Board of Directors represent diverse groups. Each year, we ask our directors and
employees to recommit to our Code of Ethics, which defines the standards of ethical behavior we expect in everyday
interactions with each other and external stakeholders.
6
EATON
UNITED STATTT ES
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
y
For the year ended
December 31, 2018
Commission file number 000-54863
EATOAA N CORPORATION
AA
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)
ff
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,yy 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,”yy 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,yy 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
ff
of the registrant as of June 30, 2018 was $32.4 billion.
As of January 31, 2019, there were 423.6 million Ordinary Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2019 annual shareholders meeting are incorporated by reference into Part III.
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.
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Item 1. Business.
Part I
Eaton Corporation plc (Eaton or the Company) is a power management company with 2018 net sales of $21.6 billion. The
Company provides energy-efficient
manage electrical, hydraulic and mechanical
power more reliably,yy safely and sustainably. Eaton has approximately 99,000 employees in 59 countries and sells products to
customers in more than 175 countries.
solutions that help its customers effectively
ff
ff
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 regarding principal products, principal markets, methods of distribution and net sales is
presented in Note 16 of the Notes to the Consolidated Financial Statements. Additional information regarding Eaton's segments
and business is presented below.
Electrical Products
rr
and Electrical Systems and Services
Principal methods of competition in these segments are performance of products and systems, technology,yy 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 2018, 23% of these segments' sales were made to seven 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 2018, 11% of this segment's sales were made to four large original equipment manufacturers or distributors of
agricultural, construction, and industrial equipment and parts.
Aerospace
rr
Principal methods of competition in this segment are total cost of ownership, product and system performance, quality,yy
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 2018, 26% 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,yy 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
2018, 61% of this segment's sales were made to nine large original equipment manufacturers of vehicles and related
components.
eMobility
Principal methods of competition in this segment are product performance, technology,yy global service, and price. Eaton has
a strong competitive position in this segment. In 2018, 19% of this segment's sales were made to four large original equipment
manufacturers of vehicles, construction equipment 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
its raw materials. In 2018, Eaton maintained appropriate levels of inventory to prevent shortages and did not experience any
availability constraints.
obtaining
ff
2
Patents and Trademarks
Eaton considers its intellectual property,yy 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,yy
some of which expire 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
on Eaton's consolidated financial
the loss or expiration of any single intellectual property right would not have a material effect
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.
ff
rr
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, 2018 and 2017 was approximately $5.3 billion and $4.8 billion, respectively. Backlog should not be relied upon
as being indicative of results of operations for future periods.
Environmental
rr
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
2019 and 2020. Information regarding the Company's liabilities related to environmental matters is presented in Note 9 of the
Notes to the Consolidated Financial Statements.
ff
Item 1A. Risk Factors.
Among the risks that could materially adversely affect
ff
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
results, and profitability.
revenues, operating
ff
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 or maintain its present market positions.
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,
customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience
difficulties
Eaton from recouping or realizing a return on the investments required to bring new products and services to market. The
Company's market positions may also be impacted by new entrants into Eaton's product or regional markets.
or delays in the research, development, production, or marketing of new products and services which may prevent
to varying degrees, by technological change and corresponding shifts in
ff
ff
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
could materially hinder the business by,yy for example, delaying Eaton's ability to bring new products to market or impairing the
success of the Company's operations.
number of qualified employees
ff
3
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,yy 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, product or service offerings
disrupted or data confidentiality lost.
could be compromised or operations could be
ff
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
business continuity plans do not effectively
ff
results or the Company may suffer
targeting the security,yy 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.
financial or reputational damage. Further,r Cyber-based risks could also include attacks
resolve the issues in a timely manner, there could be a negative impact on operating
severe damage, disruption, breach, or shutdown, and
ff
ff
Eaton's global operations subject it to economic risk as Eaton's results of operations may be adversely affected
in government legislation, regulations and policies and currency fluctuations.
ff
by changes
Operating globally subjects Eaton to changes in government regulations and policies in a large number of jurisdictions
around the world, including those related to tariffsff
privacy,yy and exchange controls. Changes in the relative values of currencies occur from time to time and could affect
operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through
operating results.
hedging activities, these risks could adversely affect
and trade barriers, investments, property ownership rights, taxation, data
Eaton's
ff
ff
Further, existing free trade laws and regulations provide certain beneficial duties and tariffsff
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, tariffsff 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
tax rate could be affected
of income among various tax jurisdictions. The Company's effective
earnings in countries with differing
statutory tax rates, changes in the valuation allowance of deferred tax assets, or changes in
tax legislation, regulations, and policies. The amount of income taxes paid is subject to ongoing audits by tax authorities in the
from amounts reserved, future financial results
countries in which Eaton operates. If these audits result in assessments different
may include unfavorable adjustments to the Company's tax liabilities.
by changes in the mix among
ff
ff
ff
ff
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
the prices Eaton's businesses are charged and the competitive position of their products and services, all of which could
affect
ff
adversely affect
ff
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.
ff
4
Eaton may be unable to adequately protect its intellectual property rights, which could affect
compete.
ff
the Company's ability to
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,yy and
contribute significantly,yy 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
deter misappropriation or independent third party development of similar technologies.
to
ff
ff
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
ff
on the
Company's businesses, financial condition or results of operations. Information regarding current legal proceedings is presented
in Note 9 and Note 10 of the Notes to the Consolidated Financial Statements.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
p
Eaton's principal executive offices
ff
are located at Eaton House, 30 Pembroke Road, Dublin 4, Ireland D04 Y0C2. The
Company maintains manufacturing facilities at approximately 284 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.
g
g
Information regarding the Company's current legal proceedings is presented in Note 9 and Note 10 of the Notes to the
Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
y
Not applicable.
Part II
Item 5. Market for the Registrant's Ordinary Equity,yy Related Stockholder Matters and Issuer Purchases of Equity
y
Securities.
y q
q
y
g
The Company's ordinary shares are listed for trading on the New York Stock Exchange under the symbol ETN. At
December 31, 2018, there were 12,846 holders of record of the Company's ordinary shares. Additionally,yy 18,972 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 equity-based compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of
this Form 10-K Report.
5
Irish Taxesaa
Applicable to Dividends
Irish income tax may arise with respect to dividends paid on Eaton shares. Generally,yy 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
dividend.
Company and have on file with their broker or qualifying agent a valid U.S. address on the record date of the
rr
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 2018, 9.8 million ordinary shares were repurchased in the open market at a total cost of $700
million. Approximately 5.5 million of 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 2018 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)
1,455,792
3,998,803
4,388,605
9,843,200
$
$
$
$
71.11
73.81
68.68
71.12
1,455,792
3,998,803
46,891
5,501,486
$
$
$
298
3
—
October
November
December
Total
Item 6. Selected Financial Data.
Information regarding selected financial data is presented in the “Five-YearYY Consolidated Financial Summary” of this Form
10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
p
y
g
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.
pp
y
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 2018 and 2017 is presented in “Quarterly Data” of this
Form 10-K.
Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
g
g
g
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;
Richard H. Fearon - Principal Financial Officer
ff
, of the effectiveness
controls and procedures. Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and
procedures were effective
of the design and operation of the Company's disclosure
as of December 31, 2018.
and
ff
ff
ff
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
Principal Financial Officer
, to allow timely decisions regarding required disclosure.
and
ff
ff
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
included in Item 15 of this Form 10-K.
ff
of internal control over financial reporting, which is
“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of
December 31, 2018 is included in Item 15 of this Form 10-K.
During the fourth quarter of 2018, there was no change in Eaton's internal control over financial reporting that materially
ff
affected,
or is reasonably likely to materially affect,
ff
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 2018, certain of our wholly-owned non-U.S. subsidiaries sold various products to customers in
Iran. We received total revenue of approximately 820,559 Euros and realized net profits of approximately 268,547 Euros from
the sales (approximately $933,380 and $305,470 in whole U.S. dollars, respectively). Eaton has determined not to take any
future orders for sales to Iran.
7
Part III
Item 10. Directors, Executive Officers and Corporate Governance.
p
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 15, 2019, and is incorporated by reference.
A listing of executive officers,
ff
their ages, positions and offices
ff
held over the past five years, as of February 15, 2019,
follows:
Name
Craig Arnold
Richard H. Fearon
Age Position (Date elected to position)
58
Chairman of Eaton Corporation plc (June 1, 2016 - present)
Chief Executive Officer
ff
of Eaton Corporation (June 1, 2016 - present)
Director of Eaton Corporation plc (September 1, 2015 - present)
President and Chief Operating Officer
ff
of Eaton Corporation
(September 1, 2015 - May 31, 2016)
Vice Chairman and Chief Operating Officer
ff
- Industrial Sector of Eaton Corporation
(February 1, 2009 - August 31, 2015)
62 Director of Eaton Corporation plc (September 1, 2015 - present)
Vice Chairman and Chief Financial and Planning Officer
ff
of Eaton Corporation
(April 24, 2002 - present)
Uday Yadav
55
Chief Operating Officer
ff
- Industrial Sector of Eaton Corporation
(September 1, 2015 - present)
President of Aerospace Group of Eaton Corporation (August 1, 2012 - August 31,
2015)
Heath B. Monesmith
48
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
54
57
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
54
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)
Curtis J. Hutchins
53
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
57
President - Aerospace Group of Eaton Corporation (September 1, 2015 - present)
Executive Vice President, Eaton Business System (August 1, 2012 - August 31, 2015)
8
Richard M. Eubanks, Jr.
(Mark)
Brian S. Brickhouse
46
55
President - Electrical Products Group of Eaton Corporation (September 1, 2015 -
present)
President, Eaton Lighting Division (February 1, 2010 - August 31, 2015)
President - Electrical Systems and Services Group of Eaton Corporation (July 1, 2018 -
present)
President, Asia Pacific Region, Electrical (May 15, 2015 - June 30, 2018)
President, Power Quality Division, Electrical Sector - Americas (August 15, 2012 -
May 14, 2015)
There are no family relationships among the officers
ff
ff
All officers
which any of them were elected as officers.
qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer
or without cause, at any time, by a vote of a majority of the Board of Directors.
listed, and there are no arrangements or understandings pursuant to
hold office
for one year and until their successors are elected and
ff
is subject to removal with
ff
ff
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 Compliance” in the Company's definitive Proxy Statement to be filed on or
about March 15, 2019, and is incorporated by reference.
The Company has adopted a Code of Ethics, which applies to the directors, officers
ff
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 2018 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 15, 2019, and
is incorporated by reference.
Item 11. Executive Compensation.
p
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 15, 2019, and is incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
p
y
g
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 15,
2019, 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”
reference.
a
in the Company's definitive Proxy Statement to be filed on or about March 15, 2019, and is incorporated by
Item 13. Certain Relationships and Related Transactions, and Director Independence.
p
p
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 15, 2019, and is
incorporated by reference.
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 15, 2019, and is incorporated by reference.
9
Item 14. Principal Accounting Fees and Services.
p
g
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 15, 2019, 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, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income - Years ended December 31, 2018, 2017 and 2016
Consolidated Balance Sheets - December 31, 2018 and 2017
Consolidated Statements of Cash Flows - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2018, 2017 and 2016
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
Company,yy N.A., as trustee (incorporated by reference to Exhibit 4.1 of Eaton
Bank of New York Mellon Trust
Corporation plc's Form 8-K Current Report filed on November 26, 2012 (Commission File No. 333-182303))
rr
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
rr
to Exhibit 4.2 of the registrant's Form S-4 filed on September 6, 2013)
Company,yy N.A., as trustee (incorporated by reference
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
Exhibit 4.3 of the registrant's Form S-4 filed on September 6, 2013)
Company,yy N.A., as trustee (incorporated by reference to
rr
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
rr
to Exhibit 4.4 of the registrant's Form 10-K filed on February 28, 2018)
Company,yy N.A., as trustee (incorporated by reference
Supplemental Indenture No. 4, dated as of December 20, 2017 and effective
Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust
trustee (incorporated by reference to Exhibit 4.5 of the registrant's Form 10-K filed on February 28, 2018)
as of January 1, 2018, among
Company,yy N.A., as
rr
ff
Supplemental Indenture No. 5, dated as of February 16, 2018, among Eaton Corporation, the guarantors
rr
named therein and The Bank of New York Mellon Trust
to Exhibit 4.6 of the registrant's Form 10-K filed on February 28, 2018)
Company,yy N.A., as trustee (incorporated by reference
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
Material contracts
(a)
Senior Executive Incentive Compensation Plan (effective
reference to the Form 10-K Report for the year ended December 31, 2012
ff
February 27, 2013) - Incorporated by
10
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
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)
(w)
(x)
(y)
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
Amendment to Amended and Restated 2012 Stock Plan - Incorporated by reference to the Form
10-K Report for the year ended December 31, 2012
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
11
(z)
(aa)
(bb)
(cc)
(dd)
(ee)
(ff)ff
(gg)
(hh)
(ii)
(jj)
(kk)
(ll)
(mm)
(nn)
(oo)
(pp)
(qq)
(rr)
(ss)
(tt)
(uu)
(vv)
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
Incorporated by reference to the Form 8-K Report filed on December 17, 2015
of Eaton Corporation -
ff
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
Form 10-K Report for the year ended December 31, 2002
ff
January 1, 2001) - Incorporated by reference to the
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
Incorporated by reference to the Form 10-K Report for the year ended December 31, 2009
November 1, 2007) -
ff
Excess Benefits Plan (amended and restated effective
to the Form 10-K Report for the year ended December 31, 2002
ff
January 1, 1989) - Incorporated by reference
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
Amended and Restated Grantor Trust
Plans - effective
ff
ended December 31, 2010
January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year
r Agreement for Non-Employee Directors’ Deferred Fees
Amended and Restated Grantor Trust
effective
ff
December 31, 2010
r Agreement for Employees’ Deferred Compensation Plans -
January 1, 2010 - Incorporated by reference to the Form 10-K Report for the year ended
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
by reference to the Form 10-K Report for the year ended December 31, 2015
ff
of Eaton Corporation - Incorporated
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
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
12
(ww)
(xx)
(yy)
(zz)
(aaa)
(bbb)
(ccc)
(ddd)
(eee)
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
Code of Ethics - Incorporated by reference to the definitive Proxy Statement filed on March 14,
2008
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
302) - Filed in conjunction with this Form 10-K Report *
ff
(Pursuant to the Sarbanes-Oxley Act of 2002, Section
Certification of Principal Financial Officer
302) - Filed in conjunction with this Form 10-K Report *
ff
(Pursuant to the Sarbanes-Oxley Act of 2002, Section
Certification of Principal Executive Officer
Section 906) - Filed in conjunction with this Form 10-K Report *
ff
(Pursuant to the Sarbanes-Oxley Act of 2002,
Certification of Principal Financial Officer
Section 906) - Filed in conjunction with this Form 10-K Report *
ff
(Pursuant to the Sarbanes-Oxley Act of 2002,
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 *
14
21
23
24
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
_______________________________
*
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, 2018, 2017 and 2016, (ii) Consolidated Statements of
Comprehensive Income for the years ended December 31, 2018, 2017 and 2016 (iii) Consolidated Balance Sheets at
December 31, 2018 and 2017, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and
2016, (v) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2018, 2017 and 2016 and (vi)
Notes to Consolidated Financial Statements for the year ended December 31, 2018.
13
Item 16. Form 10-K Summary.yyy
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.
AA
SIGNATURES
EATOAA N CORPORATION
Registrant
AA
p
plc
Date: February 27, 2019
By:
/s/ Richard H. Fearon
Richard H. Fearon
(On behalf of the registrant and as Principal Financial Officer)
ff
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 27, 2019
Signature
Title
*
Craig Arnold
/s/ Ken D. Semelsberger
Ken D. Semelsberger
Chairman, Principal Executive
Officer;
Director
ff
/s/ Richard H. Fearon
Richard H. Fearon
*
Principal Financial Officer
,
Director
ff
Principal Accounting Officer
ff
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
ff
and directors signing in the capacities indicated
15
REPORTRR OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the 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,
2018 and 2017, 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, 2018, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly,yy in all material respects, the financial
position of the Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2018, 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, 2018, 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 27, 2019 expressed an unqualified opinion thereon.
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 27, 2019
16
MANAGEMENT'S REPORTRR ON FINANCIAL STATTT EMENTS
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, 2018. 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,PP Eaton's independent
registered public accounting firm, on those consolidated 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, internal 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
ff
/s/ Richard H. Fearon
ff
Principal Financial Officer
/s/ Ken D. Semelsberger
ff
Principal Accounting Officer
February 27, 2019
17
REPORTRR OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the 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, 2018,
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,
ff
effective
internal control over financial reporting as of December 31, 2018, 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, 2018 and 2017, 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, 2018 and the related notes and our report dated February 27, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
ff
internal control over financial reporting and for its assessment
The Company’s management is responsible for maintaining effective
of internal control over financial reporting included in the accompanying Management’s Report on Internal
of the effectiveness
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.
ff
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.
ff
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.
ff
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.
ff
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.
ff
/s/ Ernst & Young LLP
Cleveland, Ohio
February 27, 2019
18
MANAGEMENT'S REPORTRR ON INTERNAL CONTROL OVER FINANCIAL REPORTING
RR
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
ff
and
ff
, we conducted an evaluation of the effectiveness
principal financial officer
reporting as of December 31, 2018. 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
of the Company's internal control over financial
as of December 31, 2018.
ff
ff
The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness
ff
of the
Company's internal control over financial reporting as of December 31, 2018. This report is included herein.
/s/ Craig Arnold
Principal Executive Officer
ff
/s/ Richard H. Fearon
ff
Principal Financial Officer
/s/ Ken D. Semelsberger
ff
Principal Accounting Officer
February 27, 2019
19
EATOAA N CORPORATION
CONSOLIDATEDAA
AA
STATTT EMENTS OF INCOME
plc
(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
Arbitration decision expense
Other (income) expense - 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
2018
2017
2016
$
21,609
$
20,404
$
19,747
14,511
3,548
584
271
—
275
(4)
2,424
278
2,146
(1)
13,756
3,526
584
246
1,077
—
1
3,368
382
2,986
(1)
13,396
3,464
587
233
—
—
(51)
2,118
199
1,919
(3)
2,145
$
2,985
$
1,916
$
4.91
4.93
$
6.68
6.71
4.20
4.21
436.9
434.3
447.0
444.5
456.5
455.0
$
$
Cash dividends declared per ordinary share
$
2.64
$
2.40
$
2.28
The accompanying notes are an integral part of the consolidated financial statements.
20
EATOAA N CORPORATION
CONSOLIDATEDAA
AA
STATTT EMENTS OF COMPREHENSIVE INCOME
plc
(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
2018
2017
2016
$
2,146
$
2,986
$
1,919
(1)
2,145
(1)
2,985
(3)
1,916
(609)
(139)
7
(741)
807
241
(4)
1,044
(570)
(6)
(9)
(585)
Total comprehensive income attributable to Eaton ordinary shareholders
$
1,404
$
4,029
$
1,331
The accompanying notes are an integral part of the consolidated financial statements.
21
EATOAA N CORPORATION
CONSOLIDATEDAA
AA
BALANCE SHEETS
plc
(In millions)
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Inventory
Prepaid expenses and other current assets
Total current assets
Property,yy plant and equipment
Land and buildings
Machinery and equipment
Gross property,yy plant and equipment
Accumulated depreciation
Net property,yy 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 (423.6 million outstanding in 2018 and 439.9 million in 2017)
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
The accompanying notes are an integral part of the consolidated financial statements.
22
December 31
2018
2017
$
$
$
$
$
$
283
157
3,858
2,785
507
7,590
2,466
6,106
8,572
(5,105)
3,467
13,328
4,846
293
1,568
31,092
414
339
2,130
457
1,814
5,154
6,768
1,304
321
349
1,054
9,796
4
12,090
8,161
(4,145)
(3)
16,107
35
16,142
$
31,092
$
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
EATOAA N CORPORATION
CONSOLIDATEDAA
AA
STATTT EMENTS OF CASH FLOWS
plc
(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,yy plant and equipment
Proceeds from sale of business
Sales (purchases) of short-term investments - net
Payments for settlement of currency exchange contracts not designated as hedges - 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
ff
Effect
of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
The accompanying notes are an integral part of the consolidated financial statements.
23
Year ended December 31
2018
2017
2016
$
2,146
$
2,986
$
1,919
903
(115)
159
(126)
(25)
—
(123)
(242)
23
23
(31)
71
144
(149)
2,658
(565)
—
355
(110)
(78)
(398)
410
(574)
(1,149)
29
(1,271)
(24)
(2)
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)
—
(40)
—
8
(529)
631
(653)
(1,037)
74
(730)
(18)
(5)
(2,581)
(2,442)
(1,738)
43
(278)
561
283
$
11
18
543
561
$
(28)
275
268
543
$
EATOAA N CORPORATION
CONSOLIDATEDAA
AA
STATTT EMENTS OF SHAREHOLDERS' EQUITY
plc
(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, 2016
458.8
$
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
ff
adoption of ASU 2016-09
adjustment upon
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
—
—
2.4
—
(11.8)
449.4
—
—
—
2.0
—
Repurchase of shares
Balance at December 31, 2017
(11.5)
439.9
Cumulative-effect
ff
adoption of ASU 2014-09
adjustment upon
Cumulative-effect
ff
adoption of ASU 2016-16
adjustment upon
Net income
Other comprehensive loss, net of tax
Cash dividends paid
Issuance of shares under equity-
based compensation plans
Changes in noncontrolling interest of
consolidated subsidiaries - net
—
—
—
—
1.2
—
Repurchase of shares
Balance at December 31, 2018
(17.5)
423.6
$
5
—
—
—
—
—
5
—
—
—
—
—
(1)
4
—
—
—
—
—
—
—
4
$ 11,701
$
7,409
$
(3,863) $
(3) $
15,249
$
—
—
144
—
—
11,845
—
—
1,916
(1,037)
(3)
—
(730)
7,555
48
2,985
—
(1,068)
142
—
—
11,987
—
—
—
—
103
—
—
(2)
—
(849)
8,669
(2)
(199)
2,145
(1,149)
(3)
—
(1,300)
—
(585)
—
—
—
—
(4,448)
—
—
1,044
—
—
—
—
—
—
—
—
—
(3)
—
—
—
—
—
—
1,916
(585)
(1,037)
141
—
(730)
14,954
48
2,985
1,044
(1,068)
140
—
(850)
(3,404)
(3)
17,253
—
—
—
(741)
—
—
—
—
—
—
—
—
—
—
—
(2)
(199)
2,145
(741)
(1,149)
100
—
(1,300)
$ 12,090
$
8,161
$
(4,145) $
(3) $
16,107
$
45
3
$15,294
1,919
(585)
(2)
(1,039)
—
(2)
—
44
—
1
141
(2)
(730)
14,998
48
2,986
1,044
(5)
(1,073)
—
(3)
—
37
—
—
1
140
(3)
(850)
17,290
(2)
(199)
2,146
(741)
(1)
(1,150)
—
(2)
100
(2)
— (1,300)
35
$16,142
The accompanying notes are an integral part of the consolidated financial statements.
24
EATOAA N CORPORATION
NOTES TO CONSOLIDATEDAA
plc
AA
FINANCIAL STATTT EMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1. SUMMARYRR OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Presentation
Eaton Corporation plc (Eaton or the Company) is a power management company with 2018 net sales of $21.6 billion. The
Company provides energy-efficient
manage electrical, hydraulic and mechanical
power more reliably,yy safely and sustainably. Eaton has approximately 99,000 employees in 59 countries and sells products to
customers in more than 175 countries.
solutions that help its customers effectively
ff
ff
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
amounts reported in the consolidated financial statements and notes. Actual results could
estimates and assumptions that affect
differ
ff
statements were filed with the Securities Exchange Commission.
from these estimates. Management has evaluated subsequent events through the date the consolidated financial
ff
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. Income from equity investments is
reported in Other (income) expense - net. Eaton does not have off-balance
unconsolidated entities. In the ordinary course of business, the Company leases certain real properties and equipment, as
described in Note 9.
sheet arrangements or financings with
ff
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 the first quarter of 2018, Eaton re-segmented certain reportable operating segments due to a reorganization of the
Company's businesses. The new reportable business segment is eMobility (which includes certain legacy Electrical Products
and Vehicle product lines). For reportable segments that were re-segmented, previously reported segment financial information
has been updated for 2016 and 2017. See Note 16 for additional information related to these segments.
Adoption of New Accounting Standards
Eaton adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers, at the start of the first
quarter of 2018 using the modified retrospective approach and recorded a cumulative effect
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. The comparative information has not been restated and
continues to be reported under the accounting standards in effect
adjustment to retained earnings
for those periods.
ff
ff
Consolidated Balance Sheet
Assets
Accounts receivable - net
Prepaid expenses and other current assets
Deferred income taxes
LLiabilities and shareholders' equity
Other current liabilities
Eaton shareholders' equity
25
Balance at
December
31, 2017
Adjustments
due to ASU
2014-09
Balance at
January 1,
2018
$
3,943
$
(99) $
3,844
679
253
129
1
808
254
$
1,872
$
17,253
33
$
(2)
1,905
17,251
Eaton adopted Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (ASU
2016-16), at the start of the first quarter of 2018. This accounting standard requires companies to recognize the income tax
of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The
ff
effects
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 requires
companies to write offff 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
earnings. Upon adoption, the Company recorded a cumulative-effect
adjustment of $199 to reduce retained earnings.
ff
ff
ff
adjustment to retained
Eaton adopted Accounting Standards Update 2017-07, Compensation - Retirement Benefits (TopicTT
715): Improving the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), at the start of the first
quarter of 2018. The new standard requires companies to present service costs consistent with other employee compensation
costs on the income statement and separate from all other elements of pension costs. The retrospective adoption of this standard
resulted in an increase in Selling and administrative expense with a corresponding increase in Other income - net of $6 for the
year ended December 31, 2018, a reduction in Selling and administrative expense with a corresponding decrease in Other
income - net of $39 for the year ended December 31, 2017, and a reduction in Cost of products sold, Selling and administrative
expense, and Research and development expense with a corresponding decrease in Other income - net of $56 for the year ended
December 31, 2016.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the
customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales
agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales
recognized over time are generally accounted for using an input measure to determine progress completed at the end of the
period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple
performance obligations, judgment is required to determine whether performance obligations specified in these agreements are
distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we
generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Payment terms vary by the type and location of the customer and the products or services offered.
ff
Generally,yy the time
between when revenue is recognized and payment is due is not significant. Eaton does not evaluate whether the selling price
includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected
concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included
in Cost of products sold.
Eaton records reductions to sales for returns, and 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
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the
Consolidated Balance Sheet. See Note 4 for additional information.
vary across businesses due to the numerous markets
ff
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,yy 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.
26
The annual goodwill impairment test was performed using a qualitative analysis in 2018 and 2017 and a quantitative
analysis in 2016. A qualitative analysis 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
analysis performed for each reporting unit. The results of the qualitative analyses did not indicate a need to perform quantitative
analysis.
Goodwill impairment testing was also performed using a quantitative analysis for the Electrical Products, Vehicle and
eMobility segments in the first quarter of 2018 due to a reorganization of the Company's businesses resulting in the creation of
the eMobility segment. The Company used the relative fair value method to reallocate goodwill among these reporting units.
Quantitative analyses were performed by estimating the fair value for each reporting unit 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 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 these analyses performed in 2018 and 2017, the fair value of Eaton's reporting units continue to substantially
exceed their respective carrying amounts and thus, no impairment exists.
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 2018 and 2017 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,yy
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 2018 and 2017, the fair value of indefinite lived intangible
assets exceeded the respective carrying value.
For additional information about goodwill and other intangible assets, see Note 6.
Other Long-Lived Assets
Depreciation and amortization for property,yy 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, 2018, the weighted-average amortization period for intangible assets subject to
amortization was 17 years for patents and technology; 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.
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 11 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.
ff
27
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.
ff
ff
Income Taxes
Deferred income tax assets and liabilities are determined based on the difference
basis of the respective assets and liabilities, using enacted tax rates in effect
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 an 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. For additional information about income taxes, see
Note 10.
ff
ff
ff
for the year when the differences
between the financial statement and tax
are expected to
Derivative Financial Instruments and Hedging Activities
Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, currency,yy 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 14 for additional information about hedges and
derivative financial instruments.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (TopicTT
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. ASU 2016-02 will require additional disclosures in the notes to the consolidated financial
statements.
Eaton adopted the standard, and related amendments, in the first quarter of 2019 using the optional transition method and
will not restate prior periods. The Company elected to use the package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed the carry forward of historical lease classification of
existing leases. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a
term of 12 months or less. Additionally,yy when accounting for leases, the Company combines payments for leased assets, related
services and other components of a lease.
The Company is in the final stage of assessing the impact of adopting the standard. The Company collected the lease data
required by the new standard, and has identified and is implementing the appropriate changes to business processes and
controls to support recognition and disclosure under the new standard. In the first quarter of 2019, Eaton plans to conclude its
adjustment of less
testing of the new third-party lease accounting system. The Company expects to record a cumulative-effect
than $1 to retained earnings as of January 1, 2019. Additionally,yy the adoption of the new standard will result in the recording of
lease assets and lease liabilities for operating leases in the range of approximately $400 to $500 as of January 1, 2019. The
Company does not expect the new standard to have a material impact to the Consolidated Statements of Income or Cash Flows.
ff
28
Note 2. SALE AND ACQUISITION OF BUSINESSES
Agreement
rr
to acquirerr controlling
rr
rr
interest
of Ulusoy Elektrik Imalat Taahhut ve Ticaretrr A.S.
On January 31, 2019, Eaton reached a definitive agreement to acquire an 82.275% controlling interest in Ulusoy Elektrik
Imalat Taahhut ve Ticaret A.S., a leading manufacturer of electrical switchgear based in Ankara, Turkey,yy with a primary focus
on medium voltage solutions for industrial and utility customers. Its sales for the 12 months ended September 30, 2018 were
$126. The purchase price for the shares is approximately $214 on a cash and debt free basis. As required by the Turkish capital
for the remaining shares shortly after
markets legislation, Eaton plans to file an application to execute a mandatory tender offer
the transaction closes. The transaction is subject to customary closing conditions and regulatory approvals.
ff
Sale of heavy-duty and medium-duty commercial
rr
vehicle automated transmission business
On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission
AA
business for $600 in cash to Cummins, Inc. The new joint venture is named Eaton Cummins Automated Transmission
Technologies (ECATT).
In 2017, 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.
Note 3. ACQUISITION INTEGRATION
AA
CHARGES
Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:
Electrical Products
Electrical Systems and Services
Total acquisition integration charges before income taxes
Income taxes
Total after income taxes
Per ordinary share - diluted
2018
2017
2016
$
$
$
— $
—
—
—
— $
— $
4
—
4
2
2
$
$
3
1
4
1
3
— $
0.01
Business segment acquisition integration charges in 2017 related to the integration of Ephesus Lighting, Inc. (Ephesus),
which was acquired in 2015. 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 Group Ltd. (Oxalis),
which was acquired in 2015. 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. In Business Segment
Information in Note 16, the charges reduced Operating profit of the related business segment.
Note 4. REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or
services have transferred to our customers. Sales are measured at the amount of consideration the Company expects to be paid
in exchange for these products or services.
The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when title and
risk and rewards of ownership have transferred to the customer. Sales recognized over time are less than 5% of Eaton’s
Consolidated Net Sales. Sales recognized over time are generally accounted for using an input measure to determine progress
completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For
agreements with multiple performance obligations, judgment is required to determine whether performance obligations
specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition
purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each
item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by
contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the
extent it is not probable that a significant reversal of cumulative sales will occur. Additionally,yy contracts can be modified to
account for changes in contract specifications, requirements or sale price. The effect
of a contract modification on the sales
price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a
cumulative catch-up basis.
ff
29
Payment terms vary by the type and location of the customer and the products or services offered.
ff
Generally,yy the time
between when revenue is recognized and when payment is due is not significant. Eaton does not evaluate whether the selling
price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes
collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are
included in Cost of products sold.
Eaton records reductions to sales for returns, and 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
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels. Returns are estimated at the time of the sale primarily based on historical experience and are recorded gross on the
Consolidated Balance Sheet.
vary across businesses due to the numerous markets
ff
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they
are typically earned at the completion of the contract when the customer is invoiced or when the customer pays Eaton.
Sales of products and services varies by segment and are discussed in Note 16.
In the Electrical Products segment, sales contracts are primarily for electrical components, industrial components,
residential products, single phase power quality,yy emergency lighting, fire detection, wiring devices, structural support systems,
circuit protection, and lighting products. These sales contracts are primarily based on a customer’s purchase order followed by
our order acknowledgement, and may also include a master supply or distributor agreement. In this segment, performance
obligations are generally satisfied at a point in time either when we ship the product from our facility,yy or when it arrives at the
customer’s facility.
In the Electrical Systems and Services segment, sales contracts are primarily for power distribution and assemblies, three
phase power quality,yy hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation, utility power
distribution, power reliability equipment, and services. The majority of the sales contracts in this segment contain performance
obligations satisfied at a point in time either when we ship the product from our facility,yy or when it arrives at the customer’s
facility; however, certain power distribution and power quality services are recognized over time.
Many of the products and services in power distribution and power quality services meet the definition of continuous
transfer of control to customers and are recognized over time. These products are engineered to a customer’s design
specifications, have no alternative use to Eaton, and are controlled by the customer as evidenced by the customer’s contractual
ownership of the work in process or our right to payment for work performed to date plus a reasonable margin. As control is
transferring over time, sales are recognized based on the extent of progress towards completion of the obligation. Eaton
generally uses an input method to determine the progress completed and sales are recorded proportionally as costs are incurred.
Incurred cost represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the
customer.
In the Hydraulics segment, sales contracts are primarily for hydraulic components and systems for industrial and mobile
equipment. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations
are generally satisfied at a point in time when we ship the product from our facility.
In the Aerospace segment, sales contracts are primarily for aerospace fuel, hydraulics, and pneumatic systems for
commercial and military use. These sales contracts are primarily based on a customer’s purchase order, and frequently covered
by terms and conditions included in a long-term agreement. In this segment, performance obligations are generally satisfied at a
point in time either when we ship the product from our facility,yy or when it arrives at the customer’s facility. Our military
contracts are primarily fixed-price contracts that are not subject to performance-based payments or progress payments from the
customer.
In the Vehicle segment, sales contracts are primarily for drivetrains, powertrain systems and critical components that reduce
emissions and improve fuel economy,yy stability,yy performance, and safety of cars, light trucks and commercial vehicles. These
sales contracts are primarily based on a customer’s purchase order or a blanket purchase order subject to firm releases,
frequently covered by terms and conditions included in a master supply agreement. In this segment, performance obligations
are generally satisfied at a point in time either when we ship the product from our facility,yy or when it arrives at the customer’s
facility.
In the eMobility segment, sales contracts are primarily for electronic and mechanical components and systems that
improves the power management and performance of both on-road and off-road
based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time either
when we ship the product from our facility,yy or when it arrives at the customer’s facility.
vehicles. These sales contracts are primarily
ff
30
In limited circumstances, primarily in the Electrical and Vehicle segments, Eaton sells separately-priced warranties that
extend the warranty coverage beyond the standard coverage offered
on specific products. Sales for these separately-priced
ff
warranties are recorded based on their stand-alone selling price and are recognized as revenue over the length of the warranty
period.
The Company’s six operating segments and the following tables disaggregate sales by lines of businesses, geographic
destination, market channel or end market.
Net sales
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
Total
Year ended December 31, 2018
United States
Rest of World
Total
$
4,112
$
3,012
$
3,936
1,190
2,088
1,566
7,124
6,024
2,756
Original
Equipment
Manufacturers
Aftermarket,
Distribution
and End User
$
$
1,085
$
811
1,896
Commercial
Passenger
and Light
Duty
1,759
$
1,730
3,489
320
$
21,609
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables
(revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of
revenue recognized). Accounts receivables from customers were $3,402 and $3,399 at December 31, 2018 and December 31,
2017, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic
intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance
Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $94 and $117 at
December 31, 2018 and January 1, 2018, respectively,yy and are recorded in Prepaid expenses and other current assets. The
decrease in unbilled receivables was primarily due to billings to customers for amounts previously recognized as revenue,
partially offset
by revenue recognized and not yet billed.
ff
Changes in the deferred revenue liabilities are as follows:
Balance at January 1, 2018
Customer deposits and billings
Revenue recognized in the period
Translation
Balance at December 31, 2018
Deferred
Revenue
$
$
227
967
(939)
(7)
248
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 of
unsatisfied or partially satisfied obligations, only the amount of orders to which customers are firmly committed are included.
Using this criterion, total backlog at December 31, 2018 was approximately $5.3 billion. Eaton expects to recognize
approximately 87% of this backlog in the next twelve months and the rest thereafter.
31
Impact of new accounting standard
In accordance with the new revenue accounting requirements, the impact of the adoption on the financial statement line
items within the accompanying consolidated financial statements was as follows:
Year ended December 31, 2018
Consolidated Statements of Income
Net sales
Cost of products sold
Income before income taxes
Income tax expense
Net income
As Reported
Adjustment
$
21,609
$
(30) $
14,511
2,424
278
2,146
(20)
(10)
(2)
(8)
Net income attributable to Eaton ordinary shareholders
$
2,145
$
(8) $
Balances
without
Adoption of
ASC 606
21,579
14,491
2,414
276
2,138
2,137
Balances
without
Adoption of
ASC 606
December 31, 2018
As Reported
Adjustment
$
3,858
$
2,785
507
293
$
60
18
(109)
(1)
3,918
2,803
398
292
$
$
1,814
16,142
$
$
(26) $
(6) $
1,788
16,136
Consolidated Balance Sheets
Assets
Accounts receivable - net
Inventory
Prepaid expenses and other current assets
Deferred income taxes
Liabilities and shareholders’ equity
Other current liabilities
Eaton shareholders' equity
Note 5. RESTRUCTURING CHARGES
During 2015, Eaton announced its commitment to undertake actions to reduce its cost structure in all business segments and
at corporate. The multi-year initiative concluded at the end of 2017.
A summary of liabilities related to workforce reductions, plant closings and other associated costs announced as part of this
program follows:
Workforce
reductions
Plant closing
and other
Total
Balance at December 31, 2016
$
113
$
Liability recognized
Payments
Other adjustments
Balance at December 31, 2017
Payments
Other adjustments
57
(102)
(1)
67
(36)
(17)
Balance at December 31, 2018
$
14
$
32
1
59
(39)
(16)
5
(4)
—
1
$
$
114
116
(141)
(17)
72
(40)
(17)
15
Note 6. GOODWILL AND OTHER INTANGIBLE
TT
ASSETS
Changes in the carrying amount of goodwill by segment follow:
Electrical Products
Electrical Systems and
Services
Hydraulics
Aerospace
Vehicle
eMobility
Total
December 31,
2016
$
6,418
$
4,203
1,221
938
342
79
13,201
$
$
Goodwill
written offff
from sale of
business
— $
(3)
—
—
(52)
—
(55) $
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
$
$
$
Translation
December 31,
2017
Translation
December 31,
2018
260
$
6,678
$
(116) $
6,562
111
36
9
4
2
422
$
4,311
1,257
947
294
81
13,568
$
(70)
(45)
(6)
(2)
(1)
(240) $
4,241
1,212
941
292
80
13,328
2018
2017
Historical
cost
Accumulated
amortization
Historical
cost
Accumulated
amortization
1,626
$
1,654
3,463
$
1,600
$
3,586
$
1,475
1,329
1,032
92
646
419
31
1,395
1,137
99
628
473
30
5,916
$
2,696
$
6,217
$
2,606
Amortization expense related to intangible assets subject to amortization in 2018, and estimated amortization expense for
each of the next five years, follows:
2018
2019
2020
2021
2022
2023
$
368
357
352
341
332
283
33
Note 7. DEBT
A summary of long-term debt, including the current portion, follows:
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 2019 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
$
$
2018
2017
— $
—
300
239
300
100
1,600
300
629
145
700
200
700
136
240
1,000
300
203
15
7,107
(339)
6,768
$
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
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, as of December 31, 2018 all of
these long-term debt instruments except 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).
The Company maintains long-term revolving credit facilities totaling $2,000, consisting of a $500 three-year revolving
credit facility that will expire November 17, 2020, a $750 five-year revolving credit facility that will expire October 14, 2021,
and a $750 five-year revolving credit facility that will expire November 17, 2022. 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, 2018 or 2017. The Company had available lines of credit of $1,079 from various banks
primarily for the issuance of letters of credit, of which there was $265 of letters of credit issued thereunder at December 31,
2018. Borrowings outside the United States are generally denominated in local currencies.
The Company repaid the 5.60% notes on May 15, 2018 for $450 and the 4.215% Japanese yen notes on December 17, 2018
for $88. 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.
Short-term debt of $414 at December 31, 2018 included $388 of short-term commercial paper in the United States, which
had a weighted average interest rate of 2.97%, and $26 of short-term debt outside the United States.
34
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,yy 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 provision which upon a change of control 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.
ff
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:
2019
2020
2021
2022
2023
Interest paid on debt follows:
2018
2017
2016
$
$
339
241
302
1,701
301
313
293
266
Note 8. 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 (gain) loss
Prior service cost (credit)
Total
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2018
2017
2018
2017
2018
2017
$
$
$
3,068
$
3,585
$
1,560
$
1,727
$
37
$
(3,633)
(3,961)
(2,285)
(2,399)
(378)
(565) $
(376) $
(725) $
(672) $
(341) $
— $
(20)
(545)
82
$
58
$
136
$
(15)
(443)
(24)
(759)
(25)
(783)
— $
(20)
(321)
$
(565) $
(376) $
(725) $
(672) $
(341) $
55
(448)
(393)
—
(31)
(362)
(393)
$
$
1,153
7
1,160
$
$
1,059
4
1,063
$
$
683
27
710
$
$
596
8
604
$
$
(20) $
(32)
(52) $
19
(46)
(27)
35
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
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
2018
2017
2018
2017
2018
2017
$
3,961
$
3,771
$
2,399
$
2,314
$
448
$
473
100
122
(272)
(282)
—
4
—
96
123
271
(301)
—
1
—
63
52
(16)
(112)
(124)
21
2
71
55
(148)
(97)
223
—
(19)
2
13
(39)
(67)
(4)
—
25
3
14
2
(74)
3
—
27
$
$
3,633
3,506
$
$
3,961
3,802
$
$
2,285
2,175
$
$
2,399
$
378
$
448
2,283
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
2018
2017
2018
2017
2018
2017
$
3,585
$
2,969
$
1,727
$
1,478
$
(252)
17
(282)
—
—
543
374
(301)
—
—
(72)
109
(112)
(93)
1
131
99
(97)
135
(19)
$
3,068
$
3,585
$
1,560
$
1,727
$
$
55
—
25
74
8
20
(67)
(74)
—
24
37
$
—
27
55
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
2018
2017
2018
2017
$
3,633
$
3,540
$
3,506
3,068
3,380
3,081
$
905
853
158
966
911
175
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
2018
2017
2018
2017
2018
2017
Balance at January 1
$
1,063
$
1,235
$
604
$
779
$
(27) $
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
4
233
—
(140)
97
1
(28)
—
(145)
(172)
$
1,160
$
1,063
$
21
161
(35)
(41)
106
710
36
—
(185)
66
(56)
(175)
—
(36)
(2)
13
(25)
(39)
—
(2)
1
13
12
$
604
$
(52) $
(27)
Benefits Expense
United States
pension benefit expense
2016
2017
2018
Non-United States
pension benefit expense
2016
2017
2018
Other postretirement
benefits expense
2017
2016
2018
Service cost
Interest cost
Expected return on plan assets
Amortization
$
$
$
$
100
122
(253)
94
63
$
96
123
(244)
83
58
111
125
(250)
92
78
63
52
(105)
39
49
$
71
55
(94)
51
83
$
63
62
(92)
33
66
$
2
13
(3)
(13)
(1)
$
3
14
(4)
(13)
—
Settlements and special
termination benefits
Total expense
46
109
$
62
120
$
81
159
$
$
2
51
$
5
88
$
3
69
$
—
—
(1) $ — $
4
17
(6)
(9)
6
1
7
The components of retirement benefits expense other than service costs are included in Other (income) expense - net.
The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic
benefit cost in 2019 follow:
Actuarial loss
Prior service cost (credit)
Total
United States
pension liabilities
Non-United States
pension liabilities
Other postretirement
liabilities
$
$
113
1
114
$
$
36
3
39
$
$
—
(14)
(14)
Retirement Benefits Plans Assumptions
For purposes of determining liabilities related to pension plans and other postretirement benefits plans in the United States,
in 2016 and 2017, the Company used 2014 mortality tables and generational improvement scales that are based on MP-2016
and MP-2017, respectively. In 2018, for the majority of its plans in the United States, the Company updated its mortality
assumption to use tables that are based on the Company's own experience and a generational improvement scale that is based
on MP-2018.
To estimate the service and interest cost components of net periodic benefit cost for the vast majority of its defined benefits
pension and other postretirement benefits plans, the Company used a spot rate approach by applying the specific spot rates
along the yield curve used to measure the benefit obligation at the beginning of the period to the relevant projected cash flows.
37
Pension Plans
United States
pension plans
2017
2016
2018
Non-United States
pension plans
2017
2018
2016
Assumptions used to determine benefit obligation at year-end
Discount rate
Rate of compensation increase
4.28% 3.64% 4.12% 2.83% 2.62% 2.63%
3.14% 3.15% 3.15% 3.10% 3.11% 3.13%
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
3.64% 4.12% 4.22% 2.62% 2.63% 3.46%
3.78% 4.31% 4.35% 3.54% 3.38% 4.13%
3.19% 3.40% 3.42% 2.31% 2.34% 3.07%
7.52% 7.90% 8.50% 6.40% 6.30% 6.62%
3.15% 3.15% 3.18% 3.11% 3.13% 3.12%
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 2019 are 7.25% and 6.42%, respectively. The discount rates were
determined using appropriate bond data for each country.
rr
Other Postretir
ement
rr
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
2017
2016
2018
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
4.23% 3.55% 3.96%
7.10% 8.25% 7.35%
4.75% 4.75% 4.75%
2026
2027
2028
3.55% 3.96% 4.04%
3.62% 4.11% 4.26%
3.04% 3.18% 3.12%
8.25% 7.35% 7.10%
4.75% 4.75% 4.75%
2025
2026
2027
Assumed health care cost trend rates may have a significant effect
ff
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:
ff
ff
Effect
on total service and interest cost
ff
Effect
on other postretirement liabilities
1% increase
1% decrease
$
$
1
11
—
(10)
38
Employer Contributions to Retirement Benefits Plans
Contributions to pension plans that Eaton expects to make in 2019, and made in 2018, 2017 and 2016, follow:
United States plans
Non-United States plans
Total contributions
2019
2018
2017
2016
$
$
20
96
116
$
$
17
109
126
$
$
374
99
473
$
$
160
102
262
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.
Estimated other postretirement
benefit payments
Estimated
United States
pension payments
Estimated
non-United States
pension payments
$
$
299
291
296
297
294
1,440
86
88
90
94
98
539
Gross
$
Medicare
prescription
drug subsidy
$
40
36
32
33
30
126
(2)
(2)
(1)
—
—
(2)
2019
2020
2021
2022
2023
2024 - 2028
Pension Plan Assets
Investment policies and strategies are developed on a country specific basis. The United States plans, representing 66% of
worldwide pension assets, and the United Kingdom plans representing 27% 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 25% United States equities, 25% non-United States equities, 8% real
estate (primarily equity of real estate investment trusts), 37% debt securities and 5% other, including hedge funds, private
equity and cash equivalents. The United Kingdom plans' target asset allocations are 62% 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.
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,yy 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.
39
Pension Plans
A summary of the fair value of pension plan assets at December 31, 2018 and 2017, follows:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)1
2018
Common collective trusts
Non-United States equity and global equities
$
612
$
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
Money market funds measured at net asset value
50
483
721
261
107
202
51
152
60
90
1,834
5
— $
—
—
—
261
—
181
51
104
60
—
612
$
50
483
721
—
107
—
—
48
—
15
—
—
—
—
—
—
21
—
—
—
75
Total pension plan assets
$
4,628
$
657
$
2,036
$
96
pension lplan assets i
1 hThese
i
hmonths or llonger,
isix
commitments to hthese f
include
l d
dand are not
funds of
d
real estate,
i
d
approximately $$180 at
iprivate
eligible for
li ibl
l
i
l
redemption
iprivate
until hthe
il
December 31,
b
di
equity f
i
credit
underlying assets are li
dand
d l i
2018 which will be satisfied by a reallocation of pension plan assets.
,
i d
periods fof
i
unfunded
distributed. hThe Company hhas unfunded
generally hhave
ll
funds hthat
d
d
ib
liquidated or di
d
id
redemption
iprivate
inotice
d
i
40
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)1
2017
Common collective trusts
Non-United States equity and global equities
$
741
$
United States equity
Fixed income
Fixed income securities
United States treasuries
Bank loans
Real estate
Equity securities
Cash equivalents
Exchange traded funds
Other
Common collective and other trusts measured at net asset
value
Hedge funds measured at net asset value
Money market funds measured at net asset value
86
478
709
67
161
239
139
86
224
81
2,225
67
9
— $
—
—
—
67
—
220
139
51
224
—
741
$
86
478
709
—
161
—
—
35
—
8
—
—
—
—
—
—
19
—
—
—
73
Total pension plan assets
$
5,312
$
701
$
2,218
$
92
1 hThese
longer
longer,
to hthese f
i
pension lplan assets i
dand are not eligible
funds of approximately
l
l d
iprivate
include
i
il
redemption
d
December 31,
b
approximately $$20 at
eligible for
real estate
until hthe underlying
dand
d
iprivate equity
equity f
underlying assets are li
d
generally hhave
funds hthat generally
d
ib
liquidated or di
d
d
distributed. hThe
id
redemption
inotice
Company hhas
y
i
i d
periods of isix
unfunded
d d
f
hmonths ror
commitments
i
2017 which will be satisfied by a reallocation of pension plan assets.
,
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2017 and 2018
due to the following:
Real estate
Other
Total
$
6
$
95
$
101
1
12
—
19
(1)
3
—
21
$
(5)
(17)
—
73
—
2
—
75
$
(4)
(5)
—
92
(1)
5
—
96
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
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, 2018
$
41
rr
Other Postretir
ement
rr
Benefits Plans
A summary of the fair value of other postretirement benefits plan assets at December 31, 2018 and 2017, follows:
Quoted prices
in active
markets for
identical
assets
(Level 1)
Total
Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)
6
$
6
$
— $
31
37
$
6
$
— $
—
—
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
$
— $
—
—
$
$
$
$
2018
Cash equivalents
Common collective and other trusts measured at net asset
value
Total other postretirement benefits plan assets
2017
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, 2018 and 2017.
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
rr
- 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.
42
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, private credit and private equity investments.
For additional information regarding fair value measurements, see Note 13.
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:
2018
2017
2016
$
124
114
72
43
Note 9. 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
on the consolidated financial statements. During the
matters, the Company believes they will not have a material adverse effect
fourth quarter of 2016, the Company was able to resolve several insurance matters. In total, the income from insurance matters
was $68.
ff
r
r
T
(the “Trust”)
in Texas state court. Pepsi
and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An
In December 2011, Pepsi-Cola Metropolitan Bottling Company,yy Inc. (“Pepsi”) filed an action against (a) Cooper Industries,
LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively,yy “Cooper”), (b)
M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc.
(collectively,yy “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust
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,
arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts opined,
among other things, that the value contributed to the Trust
and that an inability of Pneumo to satisfy future liabilities could result in plaintiffsff
submitted various expert reports and, among other things, Cooper’s experts opined that Pepsi had 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. On July 11, 2018, the arbitration panel made certain findings and concluded that the
value contributed to the Trust
that should have been contributed to the Trust
and the recalculation ordered by the panel, Cooper believed that no additional amount should be contributed. Pepsi argued that
an additional $347 should be contributed. Cooper and its expert disagreed with Pepsi’s argument and believed that Pepsi’s
recalculation was flawed and failed to comply with the instructions of the panel. On August 23, 2018, the panel issued its final
award and ordered Cooper to pay $293 to Pneumo Abex. On August 30, 2018, Pepsi sought to confirm the award in Texas state
court, which Cooper opposed on October 9, 2018. Cooper further requested that the court vacate the award on various grounds,
including that Cooper was prejudiced by the conduct of the proceedings, the panel exceeded its powers, and because the panel
denied Cooper a full and fair opportunity to present certain evidence. The court confirmed the award at the confirmation
hearing, which was held on October 12, 2018. On November 2, 2018, the Company appealed. On November 28, 2018, the
Company paid $297, the full judgment plus accrued post-judgment interest, to Pneumo Abex and preserved its rights, including
to pursue the appeal, which is pending.
did not constitute reasonably equivalent value, but ordered the parties to recalculate the amount
as of the date of the 2011 transaction. Based on the findings made by the panel
for a release of the guaranty was below reasonably equivalent value,
suing Pepsi under various theories. Cooper
rr
r
rr
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,ww 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 2018, the
Company was involved with a total of 113 sites worldwide, including the Superfund sites mentioned above, with none of these
sites being individually significant to the Company.
44
ff
the cost of environmental remediation, including the number of parties involved at a particular site, the
Remediation activities, generally involving soil and/or groundwater contamination, include pre-cleanup activities such as
fact finding and investigation, risk assessment, feasibility study,yy 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
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, 2018 and 2017, the Company had an accrual totaling $116 and $120, respectively,yy for these
costs.
ff
Based upon Eaton's analysis and subject to the difficulty
ff
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.
ff
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. A summary of the current and long-term warranty accruals follows:
Balance at January 1
Provision
Settled
Other
Balance at December 31
Lease Commitments
2018
2017
2016
$
$
$
188
139
(145)
(6)
$
180
163
(156)
1
176
$
188
$
195
117
(130)
(2)
180
Eaton leases certain real properties and equipment. A summary of minimum rental commitments at December 31, 2018
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:
2019
2020
2021
2022
2023
Thereafter
Total noncancelable lease commitments
A summary of rental expense follows:
2018
2017
2016
$
$
$
165
133
106
75
53
110
642
232
222
220
45
Note 10. INCOME TAXES
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
2017
2016
2018
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
$
$
$
$
(365) $
2,789
2,424
$
(1,090) $
4,458
3,368
$
(923)
3,041
2,118
Income tax expense (benefit)
2018
2017
2016
47
$
1
$
115
255
417
6
(122)
(23)
(139)
278
$
123
234
358
—
82
(58)
24
382
$
2
93
209
304
2
(77)
(30)
(105)
199
46
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective
ff
income tax rate
follow:
Income taxes at the applicable statutory rate
Ireland operations
Ireland tax on trading income
Nondeductible interest expense
Ireland Other - net
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
Tax on foreign currency loss
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
ff
income tax expense rate
2018
2017
2016
25.0 %
25.0 %
25.0 %
(2.0)%
7.8 %
0.1 %
0.2 %
— %
— %
(0.2)%
(0.8)%
(1.6)%
2.4 %
— %
8.2 %
— %
1.7 %
(7.5)%
4.8 %
(3.9)%
(0.5)%
— %
3.2 %
(0.3)%
11.5 %
— %
0.1 %
— %
— %
0.6 %
(0.8)%
— %
2.5 %
(19.8)%
0.7 %
(22.9)%
0.4 %
(26.8)%
0.9 %
1.1 %
(1.4)%
11.5 %
(1.8)%
4.6 %
11.3 %
(2.5)%
(0.8)%
9.4 %
ff
During 2018, income tax expense of $278 was recognized (an effective
ff
tax rate of 11.3%) and income tax expense of $199 for 2016 (an effective
tax rate of 11.5%) compared to income tax expense
tax rate of 9.4%). The
tax rate includes a tax benefit of $69 on the arbitration decision expense discussed in Note 9. The 2017 effective
of $382 for 2017 (an effective
ff
2018 effective
tax rate includes tax expense of $234 on the gain related to the sale of a 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 one-time impacts of
the 2018 arbitration decision, the 2017 sale of business, and the 2017 TCJA, the effective
compared to 9.2% for 2017. The increase in the tax rate from 2017 to 2018 was due to greater levels of income in higher tax
jurisdictions and an increase in tax contingencies offset
by net decreases of related valuation allowances. 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 (TopicTT
718): Improvements to Employee Share-Based Payment Accounting.
tax rate for 2018 was 12.8%
ff
ff
ff
ff
The TCJA was enacted on December 22, 2017, which reduced the U.S. federal corporate tax rate from 35% to 21% and
required 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. In December 2017, the Company recorded a provisional tax benefit amount of $79 for the impact
of the tax rate change on deferred tax balances and a provisional tax expense of $17 for the one-time transition tax, for a net tax
benefit of $62. During 2018, the Company finalized its accounting for the 2017 enactment of the TCJA and recorded an
adjustment of $17 tax expense, primarily related to the one-time transition tax, resulting in a final net tax benefit of $45.
No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $25.5
billion at December 31, 2018, 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.
47
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.
ff
Worldwide income tax payments, net of tax refunds, follow:
2018
2017
2016
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
$
371
288
272
2018
2017
Noncurrent
assets and
liabilities
Noncurrent
assets and
liabilities
$
481
$
(1,198)
434
1
1,915
396
(2,032)
$
(53)
(56) $
430
(1,324)
380
1
1,962
404
(1,992)
(146)
(285)
At December 31, 2018, 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
2019
through
2023
2024
through
2028
2029
through
2033
2034
through
2043
$
— $
— $
— $
— $
Not
subject to
expiration
8
Valuation
allowance
—
$
—
—
—
—
1
(1)
At December 31, 2018, 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
2019
through
2023
2024
through
2028
$
929
$
130
2029
through
2033
$ 7,433
2034
through
2043
$
788
Not
subject to
expiration
3,450
$
Valuation
allowance
—
$
41
36
188
178
686
672
104
32
225
216
120
75
892
892
31
31
(1,790)
(1,790)
(241)
(241)
112
99
116
80
48
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 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
income tax loss carryforwards and income tax credit carryforwards.
between the financial statement and income tax basis of assets and liabilities, and
ff
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
consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country,yy
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,yy
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.
will reverse,
ff
Applying the above methodology,yy 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.
Adoption of Accounting Policy
In January 2018 the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (TopicTT
220):
Reclassification of Certain Tax Effects
ff
option to reclassify to retained earnings certain income tax effects
FASB refers to as having been stranded in AOCI.
from accumulated other comprehensive income (AOCI), which gives companies the
resulting from the TCJA related to items in AOCI that the
ff
The new guidance may be applied retrospectively to each period in which the effect
ff
of the TCJA is recognized, or in the
period of adoption. Companies must adopt this guidance for years beginning after December 15, 2018 and interim periods
within those years. Early adoption is also permitted for periods for which financial statements have not yet been issued or made
available for issuance. Eaton elected to early adopt ASU 2018-02 in the fourth quarter of 2018. Eaton elected not to reclassify
any income tax effects
Company’s policy is to release income tax effects
extinguished.
resulting from the TCJA from accumulated other comprehensive loss to retained earnings. The
from AOCI when individual units of account are sold, terminated, or
ff
ff
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
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
2018
2017
2016
$
735
$
629
$
584
2
164
(35)
69
(3)
(19)
—
10
(30)
162
(10)
(26)
—
21
(24)
90
(19)
(23)
629
Balance at December 31
$
913
$
735
$
49
Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit
would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company
evaluates and adjusts the amount of unrecognized income tax benefits based on changes in facts and circumstances. 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 income tax benefits were recognized, the net impact on the provision for income tax expense would be
$599, which includes all impacts of the TCJA and interaction with deferred tax netting pursuant to ASU 2013-11. The increase
in gross unrecognized income tax benefits for positions taken in prior years was primarily offset
valuation allowances.
by net decreases in related
ff
As of December 31, 2018 and 2017, Eaton had accrued approximately $74 and $80, respectively,yy 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 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 a 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 the consolidated income tax returns of
the Company’s United States subsidiaries (“Eaton US”) 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
has also completed its examination of the consolidated income tax returns of Eaton US for 2011 through 2013 and has issued
proposed adjustments as discussed below. The statute of limitations on these tax years remains open until June 30, 2020. The
IRS is currently examining tax years 2014 through 2016. The statute of limitations for tax years 2014 through 2016 is open
until September 30, 2020. Tax year 2017 is still subject to examination by the IRS.
Eaton US is also under examination for the income tax filings in various states and localities of the United States. 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,yy going back to 2005 when those audit years are finalized. Some states and localities might not limit their
assessment to the United States federal adjustments, and may require the opening of the entire tax year.
In 2011, the IRS issued a Notice for Eaton US 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
in the United States. Eaton US has set its transfer prices for products sold between these affiliates
US sells such products to third parties as required by two successive Advance Pricing Agreements (APAs)PP
into with the IRS that governed the 2005-2010 tax years. Eaton US 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
Eaton US contested the proposed assessments in United States Tax
letter stating that it was retrospectively canceling the APAs.PP
Court. The case involved both whether the APAsPP
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 US that the IRS must abide by the
did not have a material impact on Eaton’s
terms of the APAsPP
consolidated financial statements.
for the tax years 2005-2006. The Tax Court’s ruling on the APAsPP
ff
companies located
at the same prices that Eaton
Eaton US entered
ff
In 2014, Eaton US 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 APAPP 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
did not address a secondary issue regarding the transfer pricing for
recognized that the ruling on the enforceability of the APAsPP
a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has agreed to the
royalty rate as reported by Eaton US 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.
50
The 2014 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton
US’s controlled foreign corporations. The Company believes that the proposed assessment is without merit and is contesting the
matter in Tax Court. 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, which was completed in March
2018. On February 25, 2019 the Tax Court granted the IRS’s motion for partial summary judgment and denied Eaton’s. The
Company intends to appeal the Tax Court’s decision to the United States Court of Appeals. The Company is analyzing the
impact, if any,yy the Tax Court’s decision will have on its consolidated financial statements in 2019.
In 2018 the IRS completed its examination of the Eaton US tax years 2011 through 2013 and has proposed adjustments to
certain transfer pricing tax positions, including adjustments similar to those proposed in the 2011 and 2014 Notices for products
manufactured in the Company’s facilities in Puerto Rico and the Dominican Republic and sold to affiliated
in the United States. The IRS also proposed adjustments involving the recognition of income for several of Eaton US’s
controlled foreign corporation, which is the same issue included in the 2014 Notice described above and subject to litigation in
Tax Court. The Company intends to pursue its administrative appeals alternatives with respect to each of the IRS adjustments
and believes that final resolution of the proposed adjustments will not have a material impact on its consolidated financial
statements.
companies located
ff
During 2010, the Company received a tax assessment, which included 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. In 2018 the Company received an unfavorable result at the final tax administrative appeals level,
resulting in an alleged tax deficiency of $32 plus $84 of interest and penalties (translated at the December 31, 2018 exchange
rate). The Company plans to challenge the assessment in the judicial system, which is expected to take up to 10 years to
resolve. During 2014, the Company received a tax assessment of $33 (translated at the December 31, 2018 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 remains under review at the final tax administrative appeals level.
The Company continues to believe that final resolution of both of the assessments will not have a material impact on its
consolidated financial statements.
51
Note 11. EATON SHAREHOLDERS' EQUITY
There are 750 million Eaton ordinary shares authorized ($0.01 par value per share), 423.6 million and 439.9 million of
which were issued and outstanding at December 31, 2018 and 2017, 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, 2018 and 2017, and 10 million serial
preferred shares ($0.01 par value per share), none of which is outstanding at December 31, 2018 and 2017. At December 31,
2018, there were 12,846 holders of record of Eaton ordinary shares. Additionally,yy 18,972 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, 1.5 million ordinary shares were repurchased under the
2013 Program in the open market at a total cost of $82. 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 were expected to be repurchased over time, depending on market conditions, the market price of ordinary
shares, capital levels, and other considerations. During 2018, 2017 and 2016, 13.2 million, 11.5 million and 10.3 million shares,
respectively,yy were purchased on the open market under the 2016 Program for a total cost of $1,002, $850 and $648,
respectively. An additional 4.3 million shares were purchased on the open market in December 2018 outside of the 2016
Program for a total cost of $298.
Eaton has deferral plans that permit certain employees and directors to defer a portion of their compensation. A trust
contains $8 and $11 of ordinary shares and marketable securities at December 31, 2018 and 2017, respectively,yy 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 27, 2019, Eaton's Board of Directors declared a quarterly dividend of $0.71 per ordinary share, an 8% increase
over the dividend paid in the fourth quarter of 2018. The dividend is payable on March 22, 2019 to shareholders of record on
March 9, 2019.
Comprehensive Income (Loss)
Comprehensive income (loss) consists primarily of net income, currency translation and related hedging instruments,
portion of open
changes in unrecognized costs of pension and other postretirement benefits, and changes in the effective
derivative contracts designated as cash flow hedges. The following table summarizes the pre-tax and after-tax amounts
recognized in Comprehensive income (loss):
ff
2018
2017
2016
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
After-tax
Pre-tax
$ (613) $ (609) $
Pre-tax
800
After-tax
807
$
Pre-tax
After-tax
$ (562) $ (570)
(25)
(358)
37
—
168
(178)
(8)
16
8
(20)
(274)
29
5
121
(139)
(6)
13
7
(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)
$ (783) $ (741) $ 1,128
$ 1,044
$ (549) $ (585)
52
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, 2017
$
(2,255) $
(1,139) $
(10) $
(3,404)
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, 2018
(609)
—
(260)
121
(609)
(2,864) $
(139)
(1,278) $
$
(6)
13
7
(3) $
(875)
134
(741)
(4,145)
The reclassifications out of Accumulated other comprehensive loss follow:
Amortization of defined benefits 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, 2018
Consolidated Statements of
Income classification
$
$
1
(168)
47
(121)
(16) Cost of products sold
3
(13)
(134)
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 8 for
additional information about defined benefits 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
2018
2017
2016
$
2,145
$
2,985
$
1,916
Weighted-average number of ordinary shares outstanding - diluted
Less dilutive effect
of equity-based compensation
Weighted-average number of ordinary shares outstanding - basic
ff
436.9
2.6
434.3
447.0
2.5
444.5
Net income per share attributable to Eaton ordinary shareholders
Diluted
Basic
$
$
4.91
4.93
$
6.68
6.71
456.5
1.5
455.0
4.20
4.21
In 2018, 2017, and 2016, 0.5 million, 0.4 million, and 1.7 million stock options, respectively,yy 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,
antidilutive.
accordingly,yy would have been
ff
53
Note 12. EQUITY-BASED
YY
COMPENSATION
AA
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. The Company estimates forfeitures as part of recording equity-based compensation expense.
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 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 2018, 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 2018 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
$
2.4
0.7
(0.9)
(0.1)
2.1
$
62.24
81.83
63.44
68.94
68.56
2018
2017
2016
$
$
59
46
71
$
66
43
73
65
42
71
As of December 31, 2018, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $72,
and the weighted-average period in which the expense is expected to be recognized is 2.4 years. Excess tax benefit for RSUs
and RSAs totaled $3 and $2 for 2018 and 2017, respectively. There was no excess tax benefit for RSUs and RSAs in 2016.
Performance Share Units
In February 2018, 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,yy
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
2018
2017
2016
22%
2.38%
24%
1.46%
24%
0.88%
Weighted-average fair value of PSUs granted
$
100.86
$
80.07
$
76.41
54
A summary of these PSUs that vested follows:
(Performance share units in millions)
Percent payout
Shares vested
A summary of the 2018 activity for these PSUs follows:
(Performance share units in millions)
Non-vested at January 1
Granted1
Adjusted for performance results achieved2
Vested
Forfeited
Non-vested at December 31
2018
116%
0.5
Number of
performance
share units
Weighted-average fair
value per unit
$
0.8
0.3
0.1
(0.5)
(0.1)
0.6
$
77.97
100.86
76.41
76.41
85.92
89.95
1 Performance shares granted assuming the Company will perform at target relative to peers.
2 Adjustments for the number of shares vested under the 2016 awards at the end of the three-year performance period ended December 31,
2018, being higher than the target number of shares.
In February 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 2018 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
0.1
$
—
—
—
0.1
$
56.55
—
—
—
56.55
2018
2017
2016
$
$
28
22
$
22
13
13
8
As of December 31, 2018, 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 1.8 years. There was no excess tax benefit for PSUs in
2018, 2017 and 2016.
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.
55
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
2018
2017
2016
26%
6.7
3.0%
2.6 to 2.9%
27%
6.6
2.8%
1.8 to 2.1%
27%
5.5
2.5%
1.2 to 1.5%
Weighted-average fair value of stock options granted
$
16.93
$
15.11
$
11.80
A summary of stock option activity follows:
(Options in millions)
Outstanding at January 1, 2018
Granted
Exercised
Forfeited and canceled
Outstanding at December 31, 2018
Exercisable at December 31, 2018
Reserved for future grants at December 31, 2018
Weighted-average
exercise price per
option
Options
Weighted-average
remaining
contractual life
in years
Aggregate
intrinsic
value
$
$
$
62.43
81.76
53.26
—
65.96
63.39
4.6
0.6
(0.6)
—
4.6
3.2
13.2
6.2
5.2
$
$
27.4
22.4
The aggregate intrinsic value in the table above represents the total excess of the $68.66 closing price of Eaton ordinary
shares on the last trading day of 2018 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
2018
2017
2016
$
$
11
9
29
3
—
17
11
$
$
11
8
66
13
—
41
11
$
$
14
9
74
5
1
42
14
Stock options exercised, in millions of options
0.6
1.5
1.9
As of December 31, 2018, total compensation expense not yet recognized related to non-vested stock options was $10, and
the weighted-average period in which the expense is expected to be recognized is 1.8 years.
56
Note 13. 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:
2018
Cash
Short-term investments
Net derivative contracts
2017
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)
$
$
$
$
283
157
14
561
534
36
$
$
283
157
—
561
534
—
— $
—
14
— $
—
36
—
—
—
—
—
—
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 $7,107 and fair value of $7,061 at
December 31, 2018 compared to $7,745 and $8,048, respectively,yy at December 31, 2017. 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 accounts for its investment on the equity method of accounting.
Short-TermTT
Investments
Eaton invests excess cash generated from operations in short-term marketable investments. A summary of the carrying
value, which approximates the fair value due to the short-term maturities of these investments, follows:
Time deposits and certificates of deposit with banks
Money market investments
Total short-term investments
2018
2017
$
$
111
46
157
$
$
435
99
534
57
Note 14. DERIVATVV IVE 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,
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,yy specific firm
commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
as part of a hedging relationship and, if so, as to the nature of the
ff
• Hedges of the change in the fair value of a recognized fixed-rate asset or liability,yy 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
income during the period of change in fair value.
loss or gain on the hedged item attributable to the hedged risk, are recognized in
ff
• Hedges of the variable cash flows of a recognized variable-rate asset or liability,yy or the forecasted acquisition of such
portion of the gain or loss from the derivative
an asset or liability (a cash flow hedge); for these hedges, the effective
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.
ff
• Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these
portion of the gain or loss from the derivative financial instrument is recognized in Accumulated
hedges, the effective
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.
ff
The gain or loss from a derivative financial instrument designated as a hedge that is effective
of the Consolidated Statements of Income as the offsetting
ff
derivative financial instrument that is not effective
from these financial instruments are classified in operating activities on the Consolidated Statements of Cash Flows.
ff
loss or gain on the hedged item. The change in fair value of a
as a hedge is immediately recognized in income. The cash flows resulting
is classified in the same line
ff
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 2018 and 2017, Eaton recognized gains of $1 and $2,
respectively,yy 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 at December 31, 2017 and the notes were repaid in 2018, and
designated on a pre-tax basis was $623 and $652 at December 31, 2018 and 2017, respectively. See Note 7 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 7. Eaton also entered into several forward
starting floating-to-fixed interest rate swaps to manage interest rate risk on a future anticipated debt issuance.
58
A summary of interest rate swaps outstanding at December 31, 2018, follows:
Fixed-to-Floating Interest
rr
Rate Swaps
$
Notional
amount
300
25
150
275
100
1,400
200
25
50
25
Fixed interest
rate received
6.95%
8.88%
3.88%
3.47%
8.10%
2.75%
3.68%
7.63%
7.65%
5.45%
Floating interest
rate paid
7.29%
6.07%
4.14%
3.75%
7.92%
2.57%
3.05%
4.73%
4.84%
2.55%
Forwardrr Starting Floating-to-Fixed Interest
rr
Rate Swaps
Notional
amount
Floating interest
rate to be received
Fixed interest
rate to be paid
$
50
50
—%
—%
3.10%
3.06%
Basis for contracted floating interest rate paid
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%
Basis for contracted floating interest rate received
3 month LIBOR + 0.00%
3 month LIBOR + 0.00%
59
Derivative Financial Statement Impacts
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, 2018
Derivatives designated as hedges
Fixed-to-floating interest rate swaps $ 2,550
$ — $
22
$
1
$
26
Fair value
3 months to
16 years
Forward starting floating-to-fixed
interest rate swaps
Currency exchange contracts
100
951
Total
Derivatives not designated as hedges
Currency exchange contracts
$ 3,886
Total
December 31, 2017
Derivatives designated as hedges
Fixed-to-floating interest rate swaps $ 2,965
Currency exchange contracts
924
Total
Derivatives not designated as hedges
Currency exchange contracts
Commodity contracts
$ 3,719
13
Total
$
$
$
$
$
$
$
—
2
24
$
—
19
19
40
40
1
7
8
$
$
41
7
48
39
1
40
$
$
$
$
$
$
$
3 Cash flow
8 Cash flow 1 to 36 months
37
34 years
$
1 to 12 months
—
11
12
20
20
— $
17
Fair value
22
22
$
2 Cash flow
19
6 months to
17 years
1 to 36 months
19
—
19
1 to 12 months
hmonths
1 to 12
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 receivables, payables 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
operations. This activity represents the great majority of these currency exchange contracts. For the year ended December 31,
2018, $110 of cash outflow resulting from the settlement of these derivatives has been classified in investing activities on the
Consolidated Statement of Cash Flows. The net cash flow from the settlement of these derivatives has been presented in
operating activities in prior periods and have not been restated as such amounts are not material.
of currency volatility related to the movement of goods and services in the normal course of its
ff
60
The impact of derivative instruments to the Consolidated Statements of Income and Comprehensive Income follow:
Gain (loss) recognized in
other comprehensive
(loss) income
2018
2017
Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss
Gain (loss) reclassified
from Accumulated other
comprehensive loss
2018
2017
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest
rate swaps
Interest rate locks
Currency exchange contracts
Total
$
$
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
(4) $
—
(4)
Interest expense - net
(15)
(9)
— Cost of products sold
Interest expense - net
(8) $
(24)
$
$
— $
—
(16)
(16) $
—
—
(17)
(17)
2018
2017
$
$
(30) $
(33)
30
— $
33
—
Gains and losses described above were recognized in Interest expense - net.
61
Note 15. ACCOUNTS RECEIVABLE
VV
AND INVENTORYRR
Accounts Receivable
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-offff based on historic experience. Accounts receivable balances are written offff 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 $55 and $57 at December 31, 2018 and 2017.
ff
Inventory
Inventory is carried at lower of cost or net realizable value using the first-in, first-out (FIFO) method. 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
2018
2017
$
$
1,077
$
500
1,208
2,785
$
953
471
1,196
2,620
62
Note 16. BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION
AA
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,yy 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,yy 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,yy 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
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.
buildings, hospitals, factories, utilities, and
ff
Hydraulics
The Hydraulics segment is a global leader in hydraulics components, systems and services for industrial and mobile
ff
a wide range of power products including pumps, motors and hydraulic power units; a broad range of
equipment. Eaton offers
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,yy marine, agriculture, oil and gas, construction, mining, forestry,yy utility,yy 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,yy stability,yy 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,
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.
transmission controls, fuel vapor components, fluid
ff
eMobility
The eMobility segment designs, manufactures, markets, and supplies electrical and electronic components and systems that
improve the power management and performance of both on-road and off-road
inverters, converters, fuses, onboard chargers, circuit protection units, vehicle controls, power distribution, fuel tank isolation
valves, and commercial vehicle hybrid systems. The principle markets for the eMobility segment are original equipment
manufacturers and aftermarket customers of passenger cars, commercial vehicles, and construction, agriculture, and mining
equipment.
vehicles. Products include high voltage
ff
63
Other Information
No single customer represented greater than 10% of net sales in 2018, 2017 or 2016, 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 and the cost of any special termination benefits 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.
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
occupancy,yy 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,yy plant and equipment, and certain other assets.
expenses including compensation, benefits,
ff
Business Segment Information
Net sales
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
Total net sales
Segment operating profit
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
$
$
$
2018
2017
2016
$
7,124
6,024
2,756
1,896
3,489
320
$
6,917
5,666
2,468
1,744
3,326
283
6,703
5,662
2,222
1,753
3,141
266
21,609
$
20,404
$
19,747
1,311
$
1,233
$
1,186
896
370
398
611
44
770
288
332
541
50
711
198
335
471
57
Total segment operating profit
3,630
3,214
2,958
Corporate
Amortization of intangible assets
Interest expense - net
Pension and other postretirement benefits expense
Gain on sale of business
Arbitration decision expense
Other corporate expense - net
Income before income taxes
Income tax expense
Net income
Less net income for noncontrolling interests
(382)
(271)
(1)
—
(275)
(277)
2,424
278
2,146
(1)
(388)
(246)
(45)
1,077
—
(244)
3,368
382
2,986
(1)
Net income attributable to Eaton ordinary shareholders
$
2,145
$
2,985
$
(392)
(233)
(60)
—
—
(155)
2,118
199
1,919
(3)
1,916
64
Business segment operating profit was reduced by acquisition integration charges as follows:
Electrical Products
Electrical Systems and Services
Total
2018
2017
2016
$
$
— $
—
— $
4
—
4
$
$
3
1
4
There were no corporate acquisition integration charges in 2018, 2017 and 2016. See Note 3 for additional information
about acquisition integration charges.
Identifiable assets
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
Total identifiable assets
Goodwill
Other intangible assets
Corporate
Total assets
Capital expenditures for property,yy plant and equipment
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
Total
Corporate
Total expenditures for property,yy plant and equipment
Depreciation of property,yy plant and equipment
Electrical Products
Electrical Systems and Services
Hydraulics
Aerospace
Vehicle
eMobility
Total
Corporate
2017
2016
$
2,451
$
2,446
$
2,243
1,473
935
2,289
139
9,530
13,328
4,846
3,388
2,141
1,345
938
2,367
136
9,373
13,568
5,265
4,417
2,254
2,222
1,188
830
1,534
124
8,152
13,201
5,514
3,609
31,092
$
32,623
$
30,476
135
101
106
38
143
4
527
38
$
130
$
83
96
37
141
4
491
29
565
$
520
$
136
$
138
$
85
64
26
104
5
420
53
83
61
26
109
5
422
54
128
78
92
28
142
6
474
23
497
137
82
64
27
109
4
423
63
486
$
$
$
$
Total depreciation of property,yy plant and equipment
$
473
$
476
$
65
Geographic Region Information
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property,yy 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
2018
2017
2016
$
12,034
$
11,222
$
10,937
$
$
931
1,442
4,553
2,649
942
1,485
4,394
2,361
898
1,448
4,228
2,236
21,609
$
20,404
$
19,747
1,898
$
1,872
$
1,924
20
286
723
540
20
290
769
551
19
281
681
538
$
3,467
$
3,502
$
3,443
66
Note 17. CONDENSED CONSOLIDATING
AA
FINANCIAL STATTT EMENTS
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 7 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 2018, 2017 and 2016, 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. These restructurings have
been reflected as of the beginning of the earliest period presented below.
CONSOLIDATING
AA
STATTT EMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2018
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
7,138
$
7,131
$
12,649
$
(5,309) $
21,609
Cost of products sold
Selling and administrative expense
Research and development expense
Interest expense (income) - net
Arbitration decision expense
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
$
$
—
10
—
—
—
(29)
(2,302)
176
2,145
—
2,145
—
5,644
1,438
148
273
—
37
(1,089)
(212)
899
(39)
938
—
5,172
769
149
15
275
40
(3,555)
2,215
2,051
(112)
2,163
9,011
1,331
287
(18)
—
(52)
(2,408)
(2,179)
6,677
428
6,249
(5,316)
—
—
1
—
—
9,354
—
(9,348)
1
(9,349)
14,511
3,548
584
271
275
(4)
—
—
2,424
278
2,146
—
(1)
—
(1)
2,145
$
938
$
2,163
$
6,248
$
(9,349) $
2,145
(741)
(110)
(716)
(1,575)
2,401
(741)
1,404
$
828
$
1,447
$
4,673
$
(6,948) $
1,404
67
CONSOLIDATING
AA
STATTT EMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2017
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
6,659
$
6,803
$
12,358
$
(5,416) $
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
$
$
—
11
—
—
—
79
(3,644)
569
2,985
—
2,985
—
5,276
1,374
180
245
560
38
(938)
(757)
1,801
389
1,412
—
4,997
781
179
20
—
(67)
(4,673)
1,242
4,324
(116)
4,440
8,895
1,360
225
(20)
517
(49)
(4,619)
(1,054)
8,137
111
8,026
(5,412)
—
—
1
—
—
13,874
—
(13,879)
(2)
(13,877)
13,756
3,526
584
246
1,077
1
—
—
3,368
382
2,986
—
(3)
2
(1)
2,985
$
1,412
$
4,440
$
8,023
$
(13,875) $
2,985
1,044
80
993
2,281
(3,354)
1,044
4,029
$
1,492
$
5,433
$
10,304
$
(17,229) $
4,029
68
CONSOLIDATING
AA
STATTT EMENTS OF COMPREHENSIVE INCOME
YEAR ENDED DECEMBER 31, 2016
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
Net sales
$
— $
6,447
$
6,603
$
11,706
$
(5,009) $
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
$
$
—
9
—
—
(35)
(2,433)
543
1,916
—
1,916
—
5,057
1,372
196
230
7
(556)
(334)
475
24
451
—
4,865
771
160
18
48
(3,023)
1,278
2,486
42
2,444
—
8,484
1,312
231
(14)
(71)
(2,656)
(1,487)
5,907
132
5,775
(5,010)
—
—
(1)
—
8,668
—
(8,666)
1
(8,667)
13,396
3,464
587
233
(51)
—
—
2,118
199
1,919
(5)
2
(3)
1,916
$
451
$
2,444
$
5,770
$
(8,665) $
1,916
(585)
81
(527)
(1,341)
1,787
(585)
1,331
$
532
$
1,917
$
4,429
$
(6,878) $
1,331
69
CONDENSED CONSOLIDATING
BALANCE SHEETS
AA
DECEMBER 31, 2018
$
$
$
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Intercompany accounts receivable
Inventory
Prepaid expenses and other
current assets
Total current assets
Property,yy 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
$
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
1
—
—
—
—
—
1
—
—
—
—
16,476
1,508
—
,
17,985
$
$
— $
—
—
32
—
30
62
—
—
—
—
1,816
—
1,816
$
$
$
21
—
483
1,575
540
107
2,726
843
1,330
128
340
7,658
5,843
746
,
19,614
388
338
496
1,127
135
525
3,009
5,814
383
166
1
5,182
389
11,935
— $
—
1,400
1,851
766
32
4,049
678
6,705
3,054
—
71,334
8,406
117
,
94,343
$
— $
—
416
3,206
71
259
3,952
945
130
83
508
66,507
291
68,464
$
$
$
261
157
1,975
2,968
1,555
354
7,270
1,946
5,293
1,664
288
25,551
59,147
705
,
101,864
26
1
1,218
2,029
251
1,002
4,527
7
791
72
175
1,399
374
2,818
— $
—
—
(6,394)
(76)
14
(6,456)
—
—
—
(335)
(121,019)
(74,904)
—
(
(202,714) $
)
,
— $
—
—
(6,394)
—
(2)
(6,396)
2
—
—
(335)
(74,904)
—
(75,237)
283
157
3,858
—
2,785
507
7,590
3,467
13,328
4,846
293
—
—
1,568
,
31,092
414
339
2,130
—
457
1,814
5,154
6,768
1,304
321
349
—
1,054
9,796
16,107
—
16,107
,
17,985
$
4,670
—
4,670
,
19,614
$
21,927
—
21,927
,
94,343
$
94,484
35
94,519
,
101,864
$
(121,081)
—
(121,081)
)
,
(
(202,714) $
16,107
35
16,142
,
31,092
70
CONDENSED CONSOLIDATING
BALANCE SHEETS
AA
DECEMBER 31, 2017
$
$
$
Assets
Current assets
Cash
Short-term investments
Accounts receivable - net
Intercompany accounts receivable
Inventory
Prepaid expenses and other
current assets
Total current assets
Property,yy 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
$
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
— $
—
—
8
—
—
8
—
—
—
—
15,045
3,122
—
,
18,175
$
183
—
482
2,864
473
229
4,231
859
1,316
138
356
7,942
7,089
748
,
22,679
$
$
— $
—
—
4
—
1
5
— $
542
533
4,916
128
566
6,685
—
—
—
—
917
—
917
6,180
341
192
—
3,808
313
10,834
18
—
1,376
5,117
737
145
7,393
702
6,705
3,206
6
75,661
2,909
166
,
96,748
$
$
— $
36
328
4,381
65
317
5,127
976
89
96
607
68,685
273
70,726
$
$
$
360
534
2,085
2,715
1,493
277
7,464
1,941
5,547
1,921
215
39,556
61,427
784
,
118,855
6
—
1,305
1,403
260
989
3,963
9
796
74
255
1,137
379
2,650
— $
—
—
(10,704)
(83)
28
(10,759)
—
—
—
(324)
(138,204)
(74,547)
—
(
(223,834) $
)
,
— $
—
—
(10,704)
—
(1)
(10,705)
2
—
—
(324)
(74,547)
—
(74,869)
17,253
—
17,253
,
18,175
$
5,160
—
5,160
,
22,679
$
20,895
—
20,895
,
96,748
$
112,205
37
112,242
,
118,855
$
(138,260)
—
(138,260)
)
,
(
(223,834) $
71
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
CONDENSED CONSOLIDATING
AA
STATTT EMENTS OF CASH FLOWS
DECEMBER 31, 2018
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
(26) $
(92) $
175
$
2,696
$
(95) $
2,658
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,yy
plant and equipment
Sales (purchases) of short-term
investments - net
Investments in affiliates
ff
Loans to affiliates
ff
Repayments of loans from affiliates
ff
(Payments) receipts for settlement of
currency exchange contracts not
designated as hedges - net
Other - net
Net cash provided by (used in)
investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Proceeds from borrowings from
ff
affiliates
Payments on borrowings from
ff
affiliates
Capital contributions from affiliates
ff
Other intercompany financing
activities
Cash dividends paid
Cash dividends paid to affiliates
ff
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares
withheld
Other - net
Net cash provided by (used in)
financing activities
ff
Effect
of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
Cash at the end of the period
$
—
—
(4)
—
—
—
—
(4)
—
—
(97)
—
(36)
(100)
647
11
(78)
347
388
(538)
3,756
2,452
(1,334)
(3,178)
—
—
(1,149)
—
29
(1,271)
—
—
31
—
1
—
1
—
476
—
—
—
—
(16)
(1)
(417)
—
(162)
183
(93)
—
—
(85)
1,044
—
23
889
—
(35)
318
(709)
—
(651)
—
—
—
—
(5)
—
(375)
355
—
(6,441)
4,455
(121)
(23)
(2,150)
22
(1)
100
(925)
40
175
—
(95)
—
—
(3)
(1)
—
—
40
6,626
(6,146)
—
—
520
—
—
(6,626)
6,146
(40)
—
—
95
—
—
—
—
(565)
355
—
—
—
(110)
(78)
(398)
410
(574)
—
—
—
—
(1,149)
—
29
(1,271)
(24)
(2)
(1,082)
(688)
(425)
(2,581)
—
(18)
18
43
(99)
360
261
—
—
—
$
— $
43
(278)
561
283
$
21
$
— $
72
CONDENSED CONSOLIDATING
AA
STATTT EMENTS OF CASH FLOWS
DECEMBER 31, 2017
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
258
$
(434) $
(56) $
4,507
$
(1,609) $
2,666
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,yy
plant and equipment
Cash received from sales (paid for
ff
acquisitions) of affiliates
Sales (purchases) of short-term
investments - net
Investments in affiliates
ff
Return of investments in affiliates
ff
Loans to affiliates
ff
Repayments of loans from affiliates
ff
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
ff
affiliates
Payments on borrowings from
ff
affiliates
Capital contributions from affiliates
ff
Return of capital to affiliates
ff
Other intercompany financing
activities
Cash dividends paid
Cash dividends paid to affiliates
ff
Exercise of employee stock options
Repurchase of shares
Employee taxes paid from shares
withheld
Other - net
Net cash provided by (used in)
financing activities
ff
Effect
of currency on cash
Total increase (decrease) in cash
Cash at the beginning of the period
—
—
—
(190)
—
—
—
—
—
(190)
—
—
(89)
—
—
(108)
—
(444)
303
338
(45)
(45)
1,000
(1,250)
2,605
3,130
(822)
(2,904)
—
—
—
(1,068)
—
66
(850)
—
—
(69)
—
(1)
1
—
—
616
—
—
—
—
(14)
(8)
570
—
91
92
(113)
(92)
—
—
90
(415)
384
—
9
(318)
92
(298)
(90)
—
(6,308)
3,479
269
30
—
—
—
388
(90)
7,167
(4,166)
—
—
(137)
(3,144)
3,299
—
(297)
991
(353)
90
—
574
—
(800)
—
—
(5)
(1)
—
(7)
441
(87)
298
(90)
(1,190)
—
(809)
—
—
(3)
(5)
—
—
(7,167)
4,166
(388)
90
—
—
1,609
—
—
—
—
(520)
—
(298)
—
—
—
—
607
(6)
(217)
1,000
(1,554)
—
—
—
—
—
(1,068)
—
66
(850)
(22)
(14)
199
(1,452)
(1,690)
(2,442)
—
6
12
18
$
11
(78)
438
360
—
—
—
$
— $
11
18
543
561
Cash at the end of the period
$
— $
183
$
73
CONDENSED CONSOLIDATING
AA
STATTT EMENTS OF CASH FLOWS
DECEMBER 31, 2016
Net cash provided by (used in)
operating activities
Investing activities
Capital expenditures for property,yy
plant and equipment
Sales (purchases) of short-term
investments - net
Investments in affiliates
ff
Return of investments in affiliates
ff
Loans to affiliates
ff
Repayments of loans from affiliates
ff
Other - net
Net cash provided by (used in)
investing activities
Financing activities
Proceeds from borrowings
Payments on borrowings
Proceeds from borrowings from
ff
affiliates
Payments on borrowings from
ff
affiliates
Capital contribution from affiliates
ff
Return of capital to affiliates
Other intercompany financing
ff
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
Eaton
Corporation
plc
Eaton
Corporation
Guarantors
Other
subsidiaries
Consolidating
adjustments
Total
$
(253) $
(9) $
(209) $
3,041
$
— $
2,570
—
—
(1,250)
—
—
—
—
(1,250)
—
—
3,843
(646)
—
—
—
(1,037)
74
(730)
—
—
(92)
—
(8)
—
(251)
1,293
(9)
933
21
(408)
4,045
(4,712)
—
—
206
—
—
—
(12)
1
(118)
2
(120)
47
(1,013)
335
42
(287)
(42)
(1,370)
—
(7,850)
5,616
(25)
—
—
2,748
(47)
9,114
(7,244)
—
(497)
(40)
—
—
—
—
8
(825)
(3,958)
4,571
(529)
610
(233)
1,120
(1,844)
1,370
—
21
—
—
—
(3)
(4)
—
(12)
106
(42)
1,378
(47)
(227)
—
—
—
(3)
(2)
—
—
(9,114)
7,244
(2,748)
47
—
—
—
—
—
—
631
(653)
—
—
—
—
—
(1,037)
74
(730)
(18)
(5)
1,504
(859)
1,037
1,151
(4,571)
(1,738)
ff
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
$
—
65
27
92
—
3
9
$
12
$
(28)
206
232
438
—
—
—
$
— $
(28)
275
268
543
74
MANAGEMENT’S DISCUSSION AND ANALYSIS
AA
OPERATIONS.
LL
OF FINANCIAL CONDITION AND RESULTSLL OF
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANYPP
OVERVIEWRR
Eaton Corporation plc (Eaton or the Company) is a power management company with 2018 net sales of $21.6 billion. The
manage electrical, hydraulic and mechanical
Company provides energy-efficient
power more reliably,yy safely and sustainably. Eaton has approximately 99,000 employees in 59 countries and sells products to
customers in more than 175 countries.
solutions that help its customers effectively
ff
ff
Summary of Results of Operations
During 2018, the Company's results of operations delivered strong sales growth as major global end markets expanded.
As discussed in Note 9, certain Eaton subsidiaries acquired in the 2012 acquisition of Cooper Industries have been ordered
to pay $293 by an arbitration panel. The panel’s award, issued on August 23, 2018, relate to claims brought by Pepsi-Cola
Metropolitan Bottling Company,yy Inc. (“Pepsi”) in 2011. A Texas state court confirmed the arbitration award at the confirmation
hearing, which was held on October 12, 2018. On November 2, 2018, the Company appealed. On November 28, 2018, the
Company paid the full judgment plus accrued post-judgment interest to Pneumo Abex and preserved its rights, including to
pursue the appeal, which is pending. The impact of the arbitration award was an after-tax expense of $206 in the third quarter
2018, reducing earnings per share by $0.48.
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, reducing its cost
structure and expanding 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
subsidiaries owned directly or indirectly by U.S. subsidiaries of Eaton.
by a tax expense of $17 for the taxation of unremitted earnings of non-U.S.
ff
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.
Additional information related to the sale of a business, restructuring activities, and the arbitration decision expense, is
presented in Note 2, Note 5, and Note 9, respectively,yy 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
2018
2017
2016
$
$
21,609
2,145
4.91
$
$
20,404
2,985
6.68
$
$
19,747
1,916
4.20
75
RESULTSLL OF OPERATIONS
AA
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, and Oxalis Group Ltd. in 2016. 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.
ff
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)
Adjusted earnings
2018
$ 21,609
7,098
32.8%
2,424
2,146
(1)
2,145
—
Change
from 2017
2017
Change
from 2016
2016
6 % $ 20,404
7 %
6,648
3% $ 19,747
5%
6,351
(28)%
(28)%
32.6%
3,368
2,986
(1)
59%
56%
32.2%
2,118
1,919
(3)
(28)%
2,985
56%
1,916
2
3
$
2,145
(28)% $
2,987
56% $
1,919
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
$
$
4.91
—
4.91
(26)% $
6.68
59% $
4.20
—
(26)% $
6.68
59% $
0.01
4.21
Net Sales
Net sales in 2018 increased by 6% compared to 2017 due to an increase of 6% in organic sales. The increase in organic
sales in 2018 was primarily due to higher sales volumes in all business segments. 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.
Gross Profit
Gross profit margin increased from 32.6% in 2017 to 32.8% in 2018. The increase in gross profit margin in 2018 was
primarily due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset
commodity inflation and increased freight costs. Gross profit increased from 32.2% 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.
by
ff
ff
76
Income Taxes
During 2018, income tax expense of $278 was recognized (an effective
ff
tax rate of 11.5%) compared to income tax expense
ff
tax rate of 11.3%) and income tax expense of $199 in 2016 (an effective
tax rate includes a tax benefit of $69 on the arbitration decision expense discussed in Note 9. The 2017 effective
of $382 in 2017 (an effective
2018 effective
ff
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). Excluding the one-time impacts of the 2018 arbitration decision, the 2017
sale of business, and the 2017 TCJA, the effective
9.2% for 2017 compared to 12.8% for 2018 was due to greater levels of income in higher tax jurisdictions and an increase in
tax contingencies offset
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 Accounting Standards Update
2016-09, Compensation-Stock Compensation (TopicTT
718): Improvements to Employee Share-Based Payment Accounting in
2017.
by net decreases of related valuation allowances. The decrease from 9.4% for the full year 2016
tax rate for 2018 was 12.8% compared to 9.2% for 2017. The increase from
tax rate of 9.4%). The
ff
ff
ff
ff
Net Income
Net income attributable to Eaton ordinary shareholders of $2,145 in 2018 decreased 28% compared to $2,985 in 2017. Net
income in 2018 included after-tax expense of $206 from the arbitration decision discussed in Note 9, and in 2017 included
$843 from the after-tax 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 10. Excluding these items, the increase in 2018 was primarily due to higher sales volumes, savings from
restructuring actions, and lower restructuring charges, partially offset
by commodity inflation and increased freight costs. 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 after-tax gain on the sale of the business and $62 of income from the new U.S. tax bill.
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.
ff
ff
Net income per ordinary share decreased to $4.91 in 2018 compared to $6.68 in 2017, and increased to $6.68 in 2017
compared to $4.20 in 2016. Net income per ordinary share in 2018 included an unfavorable $0.48 from the arbitration decision
expense discussed in Note 9. 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 2017 U.S. Tax Cuts and Jobs Act discussed in Note 10. Excluding these items,
Net income per ordinary share increased in 2018 and 2017 due to higher Net income attributable to Eaton ordinary shareholders
and the Company's share repurchases over the past year.
Adjusted Earnings
There were no acquisition integration charges in 2018, $2 in 2017, and $3 in 2016 after-tax, which resulted in the same
percent change for both Net income attributable to Eaton ordinary shareholders and Adjusted earnings for the respective
periods.
There was no impact of excluding the per share impact of acquisition integration charges from Net income attributable to
Eaton ordinary shareholders to arrive at Adjusted earnings per ordinary share for 2018 and 2017, and an increase of $0.01 for
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.
77
Electrical Products
Net sales
Operating profit
Operating margin
Acquisition integration charges
Before acquisition integration charges
Operating profit
Operating margin
2018
7,124
1,311
18.4%
Change
from 2017
2017
Change
from 2016
2016
3% $
6,917
3% $
6,703
6% $
1,233
4% $
1,186
17.8%
17.7%
—
$
4
$
3
$
$
$
$
1,311
6% $
1,237
4% $
1,189
18.4%
17.9%
17.7%
Net sales increased 3% in 2018 compared to 2017 due to an increase of 3% in organic sales. Organic sales grew in 2018 in
North America and Europe, primarily driven by growth in products going into commercial, residential and industrial
by weakness in North American lighting sales. Net sales increased 3% in 2017 compared to 2016
applications, partially offset
due to an increase of 3% in organic sales. Organic sales growth in 2017 was driven by growth in North America and Europe.
ff
Operating margin increased from 17.8% in 2017 to 18.4% in 2018. The increase in operating margin in 2018 was primarily
due to higher sales volumes, lower restructuring costs, and savings from restructuring actions, partially offset
inflation and increased freight costs. Operating margin increased from 17.7% in 2016 to 17.8% 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.
ff
ff
by commodity
Operating margin before acquisition integration charges increased from 17.9% in 2017 to 18.4% in 2018. The increase in
operating margin before acquisition integration charges in 2018 was primarily due to an increase in operating margin, partially
offset
by lower acquisition integration charges. Operating margin before acquisition integration charges increased from 17.7%
ff
in 2016 to 17.9% in 2017. The increase in operating margin before acquisition integration charges in 2017 was primarily due to
an increase in operating margin and higher acquisition integration charges.
Electrical Systems and Services
Net sales
Operating profit
Operating margin
Acquisition integration charges
Before acquisition integration charges
Operating profit
Operating margin
2018
6,024
Change
from 2017
2017
Change
from 2016
2016
6% $
5,666
—% $
5,662
896
14.9%
—
896
14.9%
16% $
770
8% $
711
13.6%
12.6%
$
—
$
1
16% $
770
8% $
712
13.6%
12.6%
$
$
$
$
Net sales increased 6% in 2018 compared to 2017 due to an increase of 7% in organic sales, partially offset
ff
by a decrease of
1% from the sale of a stake in a joint venture in the fourth quarter of 2017. The organic sales increase in 2018 was primarily
due to strength in large industrial projects and commercial construction markets, data centers, and oil and gas markets. Net
sales were broadly flat in 2017 compared to 2016.
Operating margin increased from 13.6% in 2017 to 14.9% in 2018. Operating margin increased in 2018 primarily due to
higher sales volumes, savings from restructuring actions, and lower restructuring costs, partially offset
unfavorable product mix, and increased freight costs. 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.
ff
ff
by commodity inflation,
78
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.
Hydraulics
Net sales
Operating profit
Operating margin
2018
2,756
Change
from 2017
2017
Change
from 2016
2016
12% $
2,468
11% $
2,222
370
13.4%
28% $
288
11.7%
45% $
198
8.9%
$
$
Net sales in 2018 increased 12% compared to 2017 due to an increase in organic sales of 11% and an increase of 1% from
the impact of positive currency translation. The increase in organic sales in 2018 was due to strength in global mobile
equipment markets. 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.
Operating margin increased from 11.7% in 2017 to 13.4% in 2018. The increase in operating margin in 2018 was primarily
due to higher sales volumes, lower restructuring costs, and savings from restructuring actions, partially offset
inflation, unfavorable product mix and increased freight costs. 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
by commodity inflation.
savings from restructuring actions, partially offset
by commodity
ff
ff
Aerospace
Net sales
Operating profit
Operating margin
2018
1,896
Change
from 2017
2017
Change
from 2016
2016
9% $
1,744
— % $
1,753
398
21.0%
20% $
332
19.0%
(1)% $
335
19.1%
$
$
Net sales in 2018 increased 9% compared to 2017 due to an increase in organic sales of 9%. The increase in organic sales
during 2018 was primarily due to higher sales in all major commercial and military end markets. Net sales were broadly flat in
2017 compared to 2016.
Operating margin increased from 19.0% in 2017 to 21.0% in 2018. The increase was primarily due to higher sales volume
and favorable product mix. 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.
ff
Vehicle
Net sales
Operating profit
Operating margin
2018
3,489
Change
from 2017
2017
Change
from 2016
2016
5% $
3,326
6% $
3,141
611
17.5%
13% $
541
16.3%
15% $
471
15.0%
$
$
Net sales increased 5% in 2018 compared to 2017 due to an increase in organic sales of 7%, partially offset
ff
by a decrease of
2% from the sale of the business discussed in Note 2. The increase in organic sales in 2018 was primarily driven by growth in
the Americas and Asia Pacific regions, with particular strength in the North American Class 8 truck market, partially offset
by
weakness in light vehicle markets in the European region. 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 in Note 2. The increase in organic sales in 2017 was primarily due to growth in
North America.
ff
ff
79
Operating margin increased from 16.3% in 2017 to 17.5% in 2018. The increase in operating margin in 2018 was primarily
due to higher sales volumes, partially offset
Operating margin increased from 15.0% in 2016 to 16.3% 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.
by unfavorable product mix, commodity inflation and increased freight costs.
ff
ff
eMobility
Net sales
Operating profit
Operating margin
2018
320
Change
from 2017
2017
Change
from 2016
2016
13 % $
283
6 % $
266
44
13.8%
(12)% $
50
17.7%
(12)% $
57
21.4%
$
$
Net sales increased 13% in 2018 compared to 2017 due to an increase in organic sales of 12% and an increase of 1% from
the impact of positive currency translation. The increase in organic sales in 2018 was primarily due to strength in North
America and Europe. Net sales increased 6% in 2017 compared to 2016 primarily due to strength in North America.
Operating margin decreased from 21.4% in 2016 to 17.7% in 2017 to 13.8% in 2018. The decrease in operating margin in
2018 and 2017 was primarily due to increased research and development costs.
Corporate Expense (Income)
2018
Change
from 2017
2017
Change
from 2016
2016
Amortization of intangible assets
Interest expense - net
Pension and other postretirement benefits expense
Gain on sale of a business
Arbitration decision expense
Other corporate expense - net
$
382
271
1
—
275
277
Total corporate expense (income)
$
1,206
(2)% $
10 %
(98)%
NM
NM
14 %
(883)% $
388
246
45
(1,077)
—
244
(154)
(1)% $
6 %
(25)%
NM
NM
57 %
(118)% $
392
233
60
—
—
155
840
Corporate results were expense of $1,206 in 2018 compared to income of $154 in 2017. The change in Total corporate
expense (income) in 2018 was primarily due to the 2018 arbitration decision discussed in Note 9 and the 2017 gain on the sale
of the business discussed in Note 2. 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.
ff
LIQUIDITY,YY CAPITALTT
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. The Company maintains long-term revolving credit
facilities totaling $2,000, consisting of a $500 three-year revolving credit facility that will expire November 17, 2020, a $750
five-year revolving credit facility that will expire October 14, 2021, and a $750 five-year revolving credit facility that will
expire November 17, 2022. 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, 2018 or 2017. The
Company had available lines of credit of $1,079 from various banks primarily for the issuance of letters of credit, of which
there was $265 outstanding at December 31, 2018. 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,yy cash flow,ww 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.
80
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,yy 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.
For additional information on financing transactions and debt, see Note 7 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 $2,658 in 2018, a decrease of $8 compared to $2,666 in 2017. The decrease
was driven by a $297 payment made during 2018 for the arbitration decision discussed in Note 9, offset
by lower pension
contributions to Eaton's U.S. qualified pension plans in 2018. Other-net includes the impact of foreign currency gains and
losses related to the remeasurement of intercompany balance sheet exposures, which have no impact on Operating cash flow.
ff
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
contributions, including $350 of voluntary contributions to Eaton's U.S. qualified pension plans.
ff
by higher pension
Investing Cash Flow
Net cash used in investing activities was $398 in 2018, an increase in the use of cash of $181 compared to $217 in 2017.
The increase in the use of cash was primarily driven by proceeds from the sale of a business as part of the formation of the
Eaton Cummins joint venture in 2017 discussed in Note 2 and $110 in payments for the settlement of currency exchange
contracts not designated as hedges discussed in Note 14, partially offset
by net sales of short-term investments of $355 in 2018
compared to net purchases of $298 in 2017. Capital expenditures were $565 in 2018 compared to $520 in 2017. Eaton expects
approximately $600 in capital expenditures in 2019.
ff
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 as part of the formation of the Eaton
Cummins joint venture in 2017, partially offset
2016. Capital expenditures were $520 in 2017 compared to $497 in 2016.
by purchases of short-term investments of $298 in 2017 compared to $40 in
ff
Financing Cash Flow
Net cash used in financing activities was $2,581 in 2018, an increase in the use of cash of $139 compared to $2,442 in
2017. The increase in the use of cash was primarily due to lower proceeds from borrowings of $410 in 2018 compared to
$1,000 in 2017, higher share repurchases of $1,271 in 2018 compared to $850 in 2017, and higher dividends paid of $1,149 in
2018 compared to $1,068 in 2017, partially offset
2017.
by lower payments on borrowings of $574 in 2018 compared to $1,554 in
ff
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
borrowings of $1,000 in 2017 compared to $631 in 2016.
by higher proceeds from
ff
81
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
Stable outlook
Stable outlook
Positive outlook
During 2018, the fair value of plan assets in the Company’s employee pension plans decreased $684 to $4,628 at
December 31, 2018. The decrease in plan assets was primarily due to lower than expected return on plan assets and the impact
of negative currency translation. At December 31, 2018, the net unfunded position of $1,290 in pension liabilities consisted of
$400 in the U.S. qualified pension plan, $865 in plans that have no minimum funding requirements, and $83 in all other plans
that require minimum funding, partially offset
by $58 in plans that are overfunded.
ff
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 2018, $126 was contributed to the pension plans. The Company anticipates making $116 of
contributions to certain pension plans during 2019. The funded status of the Company’s pension plans at the end of 2019, 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.
Off-Balance Sheet Arrangements
Eaton does not have off-balance
ff
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 9 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.
ff
ff
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the
consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the
customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales
agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales
recognized over time are generally accounted for using an input measure to determine progress completed at the end of the
period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple
performance obligations, judgment is required to determine whether performance obligations specified in these agreements are
distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we
generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by
contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the
extent it is not probable that a significant reversal of cumulative sales will occur. Additionally,yy contracts can be modified to
of a contract modification on the sales
account for changes in contract specifications, requirements or sale price. The effect
price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a
cumulative catch-up basis.
ff
82
Eaton records reductions to sales for returns, and 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
Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume
levels. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the
Consolidated Balance Sheet. See Note 4 for additional information.
vary across businesses due to the numerous markets
ff
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,yy 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
reporting unit or sustained decrease in share price.
ff
the
The annual goodwill impairment test was performed using a qualitative analysis in 2018 and 2017 and a quantitative
analysis in 2016. A qualitative analysis 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 analysis performed for each reporting unit. The results of the qualitative analyses did not
indicate a need to perform quantitative analysis.
Goodwill impairment testing was also performed using a quantitative analysis for the Electrical Products, Vehicle and
eMobility segments in the first quarter of 2018 due to a reorganization of the Company's businesses resulting in the creation of
the eMobility segment. The Company used the relative fair value method to reallocate goodwill among these reporting units.
Quantitative analyses were performed by estimating the fair value for each reporting unit 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 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 these analyses performed in 2018 and 2017, the fair value of Eaton's reporting units continue to substantially
exceed their respective carrying amounts and thus, no impairment exists.
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 2018 and 2017 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.
Additionally,yy 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
intangible assets.
inputs used to determine the respective fair values of the indefinite-lived
ff
For 2018 and 2017, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
83
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 6 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
income tax loss carryforwards and income tax credit carryforwards.
between the financial statement and income tax basis of assets and liabilities, and
ff
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
consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in a particular country,yy
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,yy 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 10 to the Consolidated Financial
Statements.
will reverse,
ff
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.
ff
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,yy 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.
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.
To estimate the service and interest cost components of net periodic benefit cost for the vast majority of its defined benefits
pension and other postretirement benefits plans, the Company used a spot rate approach by applying the specific spot rates
along the yield curve used to measure the benefit obligation at the beginning of the period to the relevant projected cash flows.
84
Key assumptions used to calculate pension and other postretirement benefits expense are adjusted at each year-end. A 1-
on
percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $50 effect
on
pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $62 effect
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 $2 effect
on expense for other postretirement benefits plans.
ff
ff
ff
ff
Additional information related to changes in key assumptions used to recognize expense for other postretirement benefits
plans is found in Note 8 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,ww or the state equivalents thereof, at a number of disposal sites.
A number of factors affect
ff
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, 2018 and 2017, $116 and $120, respectively,yy was accrued for these costs.
Based upon Eaton's analysis and subject to the difficulty
ff
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.
ff
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,yy 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 14 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, 2018, 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 2018, a 100 basis-point increase in short-term interest rates
would have increased the Company’s net, pretax interest expense by $24.
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 increase in interest rates at December 31, 2018, the market value of the Company’s debt and interest rate swap portfolio,
in aggregate, would increase by $463.
The Company is exposed to currency risk associated with translating its functional currency financial statements into its
reporting currency,yy 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.
85
CONTRACTUAL OBLIGATIONS
AA
A summary of contractual obligations as of December 31, 2018 follows:
Long-term debt, including current portion(1)
Interest expense related to long-term debt
Increase (reduction) of interest expense from
interest rate swap agreements related to long-
term debt
Operating leases
Purchase obligations
Other obligations
Total
2019
$
$
339
255
3
165
993
144
2020
to
2021
2022
to
2023
Thereafter
Total
543
483
1
239
117
8
$
2,002
$
4,217
$
391
1,795
(8)
128
33
9
(37)
110
—
23
7,101
2,924
(41)
642
1,143
184
$
1,899
$
1,391
$
2,555
$
6,108
$
11,953
(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.
ff
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 increase (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 obligations principally include $116 of
anticipated contributions to pension plans in 2019, $21 of other postretirement benefits payments expected to be paid in 2019,
and $44 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 all other future expected pension and other postretirement benefits payments.
Information related to the amounts of these future payments is described in Note 8 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, 2018, the gross
liability for unrecognized income tax benefits totaled $913 and interest and penalties were $74.
FORWARR
RD-LOOKING STATTT EMENTS
This Annual Report to Shareholders contains forward-looking statements concerning litigation and regulatory
developments, expected pension or other post-retirement benefits 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,yy 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,”yy “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
ff 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;
ff
resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties
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.
unexpected claims, charges, litigation or dispute
integrating
ff
86
RR
QUARTERL
YLL DATAAA
(unaudited)
Quarter ended in 2018
Quarter ended in 2017
(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
$ 5,459
$
5,412
$ 5,487
$ 5,251
$ 5,213
$
5,211
$ 5,132
$ 4,848
1,789
1,815
1,816
1,678
1,678
1,745
1,684
1,541
Percent of net sales
32.8%
33.5%
33.1%
32.0%
32.2%
33.5%
32.8%
31.8%
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
726
632
(1)
439
416
—
694
611
(1)
565
487
1
635
634
—
1,694
1,401
572
517
—
(1)
467
434
—
$
631
$
416
$
610
$
488
$
634
$
1,401
$
516
$
434
Diluted
Basic
$
1.46
$
1.46
0.95
0.96
$
1.39
1.40
$
1.10
1.11
$
1.43
1.44
$
3.14
3.16
$
1.15
1.16
$
0.96
0.97
Cash dividends declared per
ordinary share
$
0.66
$
0.66
$
0.66
$
0.66
$
0.60
$
0.60
$
0.60
$
0.60
Earnings per share for the four quuarters in aa yyear may noott equal full yyear earninggs per sharee.
Acquisition integration charges inncluded in IIncome befoorre income ttaaxes are as ffoollows:
Acquisition integration charges
$ — $
— $
— $
— $
1
$
1
$
1
$
1
Quarter endded in 2018
Quarter enddeed in 2017
Dec. 31
Sept. 30
June 30
Mar. 31
Dec. 31
Sept. 30
June 30
Mar. 31
FIVE-YEAR CONSOLIDATEDAA
FINANCIAL SUMMARYRR (unaudited)
(In millions except for per share data)
Net sales
Income before income taxes
Net income
Less net income for noncontrolling interests
2018
2017
2016
2015
2014
$21,609
$20,404
$19,747
$20,855
$22,552
2,424
2,146
3,368
2,986
2,118
1,919
2,133
1,974
1,762
1,804
(1)
(1)
(3)
(2)
(10)
Net income attributable to Eaton ordinary shareholders
$ 2,145
$ 2,985
$ 1,916
$ 1,972
$ 1,794
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
$
4.91
$
6.68
$
4.20
$
4.22
$
3.76
4.93
6.71
4.21
4.23
3.78
436.9
434.3
447.0
444.5
456.5
455.0
467.1
465.5
476.8
474.1
$
2.64
$
2.40
$
2.28
$
2.20
$
1.96
$31,092
$32,623
$30,476
$31,059
$33,557
6,768
7,521
7,167
7,751
6,711
8,277
7,746
8,414
7,982
8,992
16,107
17,253
14,954
15,249
15,856
$ 38.02
$ 39.22
$ 33.28
$ 33.24
$ 33.89
423.6
439.9
449.4
458.8
467.9
Eaton Corporation plc
2018 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
ff
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
ff
conclusions about the effectiveness
this report based on such evaluation; and
ff
of the registrant’s disclosure controls and procedures and presented in this report our
of the disclosure controls and procedures, as of the end of the period covered by
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,
ff
and
the registrant’s internal control over financial reporting;
or is reasonably likely to materially affect,
ff
5. The registrant’s other certifying officer
ff
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
report financial information; and
ff
the registrant’s ability to record, process, summarize 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 27, 2019
/s/ Craig Arnold
Craig Arnold
Principal Executive Officer
ff
Eaton Corporation plc
2018 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
ff
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
ff
conclusions about the effectiveness
this report based on such evaluation; and
ff
of the registrant’s disclosure controls and procedures and presented in this report our
of the disclosure controls and procedures, as of the end of the period covered by
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,
ff
and
the registrant’s internal control over financial reporting;
or is reasonably likely to materially affect,
ff
5. The registrant’s other certifying officer
ff
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
report financial information; and
ff
the registrant’s ability to record, process, summarize 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 27, 2019
/s/ Richard H. Fearon
Richard H. Fearon
Principal Financial Officer
ff
Eaton Corporation plc
2018 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, 2018 (“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 27, 2019
/s/ Craig Arnold
Craig Arnold
Principal Executive Officer
ff
Eaton Corporation plc
2018 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, 2018 (“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 27, 2019
/s/ Richard H. Fearon
Richard H. Fearon
Principal Financial Officer
ff
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Shareholder Information
(This content was not included in our 10-K SEC filing.)
Annual General Meeting
of Shareholders
The company’s 2019 Annual General Meeting
of Shareholders will be held at 8:00 a.m., Dublin
time, on Wednesday, April 24, 2019, at Eaton
House, 30 Pembroke Road, Dublin 4, Ireland.
Formal notice of the meeting will be made
available on or about March 15, 2019, to each
shareholder of record as of February 25, 2019.
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.
Annual Report to Shareholders
This 2018 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 to the left.
Other public financial reports also are available
on Eaton’s website at www.eaton.com.
Annual Certifications
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
2018. Additionally, Eaton submitted to the New
York Stock Exchange its 2018 Chief Executive
Officer Certification regarding Eaton’s compliance
with the corporate governance listing standards
of the Exchange.
Broadridge Corporate Issuer Solutions
Regular Mail: P.O. Box 1342, Brentwood, NY 11717
Registered/Overnight Packages: ATTN: IWS, 1155 Long Island Ave., Edgewood, NY 11717
Phone: +1 888.597.8625 (U.S. & Canada) +1 303.562.9631 (Toll)TT
TDD: +1 855.627.5080 (hearing impaired inside the U.S.)
TDD: +1 720.399.2074 (hearing impaired outside the U.S.)
Email: shareholder@broadridge.com
Website: https://shareholder.broadridge.com/eaton-corp/
Dividend Reinvestment and Direct Stock Purchase Plan
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
Broadridge, as shown above.
Direct Deposit of Dividends
Shareholders of record may have their dividends directly deposited into their bank accounts.
Interested shareholders of record should contact Broadridge, as shown above.
Forward-Looking Statements
This Annual Report to Shareholders, including the Chairman’s letter,r contains forward-looking
statements concerning 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.
Eaton Shareholder
Contact Information
Investor Relations, Eaton
1000 Eaton Boulevard
Cleveland, OH 44122 USA
+1 440.523.4059
www.eaton.com
Quarterly
Financial Releases
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 +1 440.523.4059.
Common Shares
Listed for trading:
New York Stock Exchange
(Ticker Symbol: ETN)
This publication was printed at an
FSC®-certified printer. The FSC Logo
identifies products that contain wood
or wood fiber 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 content and recyclable
papers were employed throughout
this publication.
EATON
Directors and Leadership Team As of March 1, 2019
Directors, Eaton Corporation plc
Craig Arnold 5*
Chairman, Eaton Corporation plc, Dublin, Ireland
Todd M. Bluedorn 2*, 3, 5
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 1, 4, 5
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*, 5
Retired Former President and Chief Executive
Officer of the Federal Reserve Bank of Cleveland
Arthur E. Johnson 2, 4*, 5
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 2, 3
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
Gerald B. Smith 1*, 3 , 5
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
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
Mark Eubanks
President–Electrical Products Group
Donald H. Bullock
Senior Vice President–Investor
Relations
Heath B. Monesmith
Executive Vice President and
General Counsel
Richard H. Fearon
Vice Chairman and Chief Financial
and Planning Officer
Uday Yadav
President and Chief Operating Officer,
Industrial Sector
Brian S. Brickhouse
President–Electrical Systems and
Services Group
Frank C. Campbell
President–Europe, Middle East
and Africa Region, Corporate and
Electrical Sector
Nandakumar Cheruvatath
President–Aerospace Group
João V. Faria
President–Vehicle Group
Curtis J. Hutchins
President–Hydraulics Group
Nancy L.
Berardinelli-Krantz
Senior Vice President–
Global Ethics and Compliance
William W. Blausey Jr.
Senior Vice President and Chief
Information Officer
Rogerio Branco
Executive Vice President–
Supply Chain Management
Mary Kim Elkins
Senior Vice President–Taxes
Harold V. Jones
Executive Vice President–Eaton
Business System and Sustainability
Ernest W. Marshall Jr.
Executive Vice President and Chief
Human Resources Officer
John J. Matejka
Senior Vice President–
Internal Audit
Trent M. Meyerhoefer
Senior Vice President–Treasury
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
Taras G. Szmagala Jr.
Senior Vice President–Public and
Community Affairs and Corporate
Communications
2018 ANNUAL REPORT
We make what matters work.
Eaton Corporation plc
Eaton House
30 Pembroke Road
Dublin 4, Ireland
www.eaton.com
©2019 Eaton
All Rights Reserved
Printed in USA
Eaton is a registered trademark.
All other trademarks are property
of their respective owners.
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