UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 20172019
Commission file number 000-54863
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EATON CORPORATION plc |
(Exact name of registrant as specified in its charter) |
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Ireland | | 98-1059235 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification Number) |
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Eaton House, | 30 Pembroke Road, | Dublin 4, | Ireland | | D04 Y0C2 |
(Address of principal executive offices) | | (Zip Code) |
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| | | | | +353 | 1637 2900 | | | | |
| | | (Registrant's telephone number, including area code) | | | |
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| | | Not applicable | | | |
| | | (Former name, former address and former fiscal year if changed since last report) | | |
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Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Ordinary shares ($0.01 par value) | | ETN | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ☑ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filerþ | ☑ | | Accelerated filero | ☐ | | Non-accelerated filero | ☐ |
Smaller reporting companyo | ☐ | | Emerging growth companyo | ☐ | | (Do not check if a smaller reporting company) | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No þ☑
There were 440.6413.4 million Ordinary Shares outstanding as of September 30, 20172019.
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TABLE OF CONTENTS |
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EX-12 | |
EX-31.1 | |
EX-31.2 | |
EX-32.1 | |
EX-32.2 | |
EX-101 INSTANCE DOCUMENT | |
EX-101 SCHEMA DOCUMENT | |
EX-101 CALCULATION LINKBASE DOCUMENT | |
EX-101 DEFINITION LINKBASE DOCUMENT | |
EX-101 LABELS LINKBASE DOCUMENT | |
EX-101 PRESENTATION LINKBASE DOCUMENT | |
PART I — FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS. |
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
| | | Three months ended September 30 | | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
(In millions except for per share data) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 5,211 |
| | $ | 4,987 |
| | $ | 15,191 |
| | $ | 14,880 |
| $ | 5,314 |
| | $ | 5,412 |
| | $ | 16,152 |
| | $ | 16,150 |
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Cost of products sold | 3,469 |
| | 3,371 |
| | 10,229 |
| | 10,081 |
| 3,512 |
| | 3,597 |
| | 10,782 |
| | 10,841 |
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Selling and administrative expense | 916 |
| | 853 |
| | 2,703 |
| | 2,642 |
| 885 |
| | 889 |
| | 2,709 |
| | 2,679 |
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Research and development expense | 147 |
| | 146 |
| | 440 |
| | 444 |
| 147 |
| | 138 |
| | 454 |
| | 439 |
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Interest expense - net | 60 |
| | 59 |
| | 181 |
| | 173 |
| 54 |
| | 67 |
| | 183 |
| | 205 |
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Gain on sale of business | 1,077 |
| | — |
| | 1,077 |
| | — |
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Other expense (income) - net | 5 |
| | (15 | ) | | (10 | ) | | (28 | ) | |
Arbitration decision expense | | — |
| | 275 |
| | — |
| | 275 |
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Other (income) expense - net | | (2 | ) | | 7 |
| | (35 | ) | | 13 |
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Income before income taxes | 1,691 |
| | 573 |
| | 2,725 |
| | 1,568 |
| 718 |
| | 439 |
| | 2,059 |
| | 1,698 |
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Income tax expense | 292 |
| | 51 |
| | 378 |
| | 151 |
| 116 |
| | 23 |
| | 299 |
| | 184 |
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Net income | 1,399 |
| | 522 |
| | 2,347 |
| | 1,417 |
| 602 |
| | 416 |
| | 1,760 |
| | 1,514 |
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Less net (income) loss for noncontrolling interests | — |
| | 1 |
| | (1 | ) | | 1 |
| |
Less net income for noncontrolling interests | | (1 | ) | | — |
| | (1 | ) | | — |
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Net income attributable to Eaton ordinary shareholders | $ | 1,399 |
| | $ | 523 |
| | $ | 2,346 |
| | $ | 1,418 |
| $ | 601 |
| | $ | 416 |
| | $ | 1,759 |
| | $ | 1,514 |
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Net income per share attributable to Eaton ordinary shareholders | | | | | | | | | | | | | | |
Diluted | $ | 3.14 |
| | $ | 1.15 |
| | $ | 5.23 |
| | $ | 3.09 |
| $ | 1.44 |
| | $ | 0.95 |
| | $ | 4.16 |
| | $ | 3.45 |
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Basic | 3.16 |
| | 1.15 |
| | 5.26 |
| | 3.10 |
| 1.44 |
| | 0.96 |
| | 4.18 |
| | 3.47 |
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Weighted-average number of ordinary shares outstanding | | | | | | | | | | | | | | |
Diluted | 445.2 |
| | 455.6 |
| | 448.3 |
| | 457.9 |
| 418.4 |
| | 436.3 |
| | 422.5 |
| | 438.4 |
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Basic | 442.6 |
| | 453.9 |
| | 445.9 |
| | 456.5 |
| 416.6 |
| | 433.5 |
| | 420.7 |
| | 435.8 |
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Cash dividends declared per ordinary share | $ | 0.60 |
| | $ | 0.57 |
| | $ | 1.80 |
| | $ | 1.71 |
| $ | 0.71 |
| | $ | 0.66 |
| | $ | 2.13 |
| | $ | 1.98 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | Three months ended September 30 | | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
(In millions) | 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 1,399 |
| | $ | 522 |
| | $ | 2,347 |
| | $ | 1,417 |
| $ | 602 |
| | $ | 416 |
| | $ | 1,760 |
| | $ | 1,514 |
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Less net (income) loss for noncontrolling interests | — |
| | 1 |
| | (1 | ) | | 1 |
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Less net income for noncontrolling interests | | (1 | ) | | — |
| | (1 | ) | | — |
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Net income attributable to Eaton ordinary shareholders | 1,399 |
| | 523 |
| | 2,346 |
| | 1,418 |
| 601 |
| | 416 |
| | 1,759 |
| | 1,514 |
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Other comprehensive income (loss), net of tax | | | | | | | | |
Other comprehensive (loss) income, net of tax | | | | | | | | |
Currency translation and related hedging instruments | 195 |
| | (22 | ) | | 743 |
| | (57 | ) | (252 | ) | | (132 | ) | | (235 | ) | | (546 | ) |
Pensions and other postretirement benefits | 16 |
| | 45 |
| | 53 |
| | 132 |
| 35 |
| | 40 |
| | 88 |
| | 122 |
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Cash flow hedges | (12 | ) | | 1 |
| | (11 | ) | | (33 | ) | (42 | ) | | (6 | ) | | (75 | ) | | (2 | ) |
Other comprehensive income (loss) attributable to Eaton ordinary shareholders | 199 |
| | 24 |
| | 785 |
| | 42 |
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Other comprehensive loss attributable to Eaton ordinary shareholders | | (259 | ) | | (98 | ) | | (222 | ) | | (426 | ) |
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Total comprehensive income attributable to Eaton ordinary shareholders | $ | 1,598 |
| | $ | 547 |
| | $ | 3,131 |
| | $ | 1,460 |
| $ | 342 |
| | $ | 318 |
| | $ | 1,537 |
| | $ | 1,088 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS
| | (In millions) | September 30, 2017 | | December 31, 2016 | September 30, 2019 | | December 31, 2018 |
Assets | | | | | | |
Current assets | | | | | | |
Cash | $ | 791 |
| | $ | 543 |
| $ | 549 |
| | $ | 283 |
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Short-term investments | 843 |
| | 203 |
| 281 |
| | 157 |
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Accounts receivable - net | 3,962 |
| | 3,560 |
| 3,787 |
| | 3,858 |
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Inventory | 2,457 |
| | 2,254 |
| 2,901 |
| | 2,785 |
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Prepaid expenses and other current assets | 396 |
| | 381 |
| 494 |
| | 507 |
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Total current assets | 8,449 |
| | 6,941 |
| 8,012 |
| | 7,590 |
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Property, plant and equipment | | | | | | |
Land and buildings | 2,498 |
| | 2,369 |
| 2,436 |
| | 2,466 |
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Machinery and equipment | 5,940 |
| | 5,670 |
| 6,257 |
| | 6,106 |
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Gross property, plant and equipment | 8,438 |
| | 8,039 |
| 8,693 |
| | 8,572 |
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Accumulated depreciation | (4,952 | ) | | (4,596 | ) | (5,210 | ) | | (5,105 | ) |
Net property, plant and equipment | 3,486 |
| | 3,443 |
| 3,483 |
| | 3,467 |
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Other noncurrent assets | | | | | | |
Goodwill | 13,545 |
| | 13,201 |
| 13,337 |
| | 13,328 |
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Other intangible assets | 5,354 |
| | 5,514 |
| 4,657 |
| | 4,846 |
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Operating lease assets | | 444 |
| | — |
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Deferred income taxes | 264 |
| | 360 |
| 294 |
| | 293 |
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Other assets | 1,627 |
| | 960 |
| 1,668 |
| | 1,568 |
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Total assets | $ | 32,725 |
| | $ | 30,419 |
| $ | 31,895 |
| | $ | 31,092 |
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Liabilities and shareholders’ equity | | | | | | |
Current liabilities | | | | | | |
Short-term debt | $ | 5 |
| | $ | 14 |
| $ | 2 |
| | $ | 414 |
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Current portion of long-term debt | 1,494 |
| | 1,552 |
| 6 |
| | 339 |
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Accounts payable | 2,039 |
| | 1,718 |
| 2,290 |
| | 2,130 |
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Accrued compensation | 434 |
| | 379 |
| 421 |
| | 457 |
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Other current liabilities | 1,928 |
| | 1,822 |
| 1,942 |
| | 1,814 |
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Total current liabilities | 5,900 |
| | 5,485 |
| 4,661 |
| | 5,154 |
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Noncurrent liabilities | | | | | | |
Long-term debt | 7,273 |
| | 6,711 |
| 8,013 |
| | 6,768 |
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Pension liabilities | 1,328 |
| | 1,659 |
| 1,239 |
| | 1,304 |
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Other postretirement benefits liabilities | 366 |
| | 368 |
| 322 |
| | 321 |
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Operating lease liabilities | | 333 |
| | — |
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Deferred income taxes | 327 |
| | 321 |
| 309 |
| | 349 |
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Other noncurrent liabilities | 895 |
| | 934 |
| 1,118 |
| | 1,054 |
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Total noncurrent liabilities | 10,189 |
| | 9,993 |
| 11,334 |
| | 9,796 |
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Shareholders’ equity | | | | | | |
Eaton shareholders’ equity | 16,593 |
| | 14,897 |
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Ordinary shares (413.4 million outstanding in 2019 and 423.6 million in 2018) | | 4 |
| | 4 |
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Capital in excess of par value | | 12,151 |
| | 12,090 |
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Retained earnings | | 8,062 |
| | 8,161 |
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Accumulated other comprehensive loss | | (4,367 | ) | | (4,145 | ) |
Shares held in trust | | (2 | ) | | (3 | ) |
Total Eaton shareholders’ equity | | 15,848 |
| | 16,107 |
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Noncontrolling interests | 43 |
| | 44 |
| 52 |
| | 35 |
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Total equity | 16,636 |
| | 14,941 |
| 15,900 |
| | 16,142 |
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Total liabilities and equity | $ | 32,725 |
| | $ | 30,419 |
| $ | 31,895 |
| | $ | 31,092 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | Nine months ended September 30 | Nine months ended September 30 |
(In millions) | 2017 | | 2016 | 2019 | | 2018 |
Operating activities | | | | | | |
Net income | $ | 2,347 |
| | $ | 1,417 |
| $ | 1,760 |
| | $ | 1,514 |
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Adjustments to reconcile to net cash provided by operating activities | | | | | | |
Depreciation and amortization | 685 |
| | 700 |
| 668 |
| | 680 |
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Deferred income taxes | (181 | ) | | (105 | ) | (71 | ) | | (211 | ) |
Pension and other postretirement benefits expense | 161 |
| | 177 |
| 115 |
| | 123 |
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Contributions to pension plans | (447 | ) | | (114 | ) | (89 | ) | | (99 | ) |
Contributions to other postretirement benefits plans | (14 | ) | | (26 | ) | (11 | ) | | (26 | ) |
Gain on sale of business | (843 | ) | | — |
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Changes in working capital | (144 | ) | | (206 | ) | 6 |
| | 62 |
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Other - net | 223 |
| | 89 |
| 136 |
| | (205 | ) |
Net cash provided by operating activities | 1,787 |
| | 1,932 |
| 2,514 |
| | 1,838 |
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Investing activities | |
| | | |
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Capital expenditures for property, plant and equipment | (351 | ) | | (346 | ) | (441 | ) | | (411 | ) |
Proceeds from sale of business | 600 |
| | — |
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Cash received from acquisitions of businesses, net of cash acquired | — |
| | 1 |
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Purchases of short-term investments - net | (621 | ) | | (29 | ) | |
Cash paid for acquisitions of businesses, net of cash acquired | | (277 | ) | | — |
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Sales (purchases) of short-term investments - net | | (132 | ) | | 329 |
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Proceeds (payments) for settlement of currency exchange contracts not designated as hedges - net | | 26 |
| | (122 | ) |
Other - net | (63 | ) | | 3 |
| (8 | ) | | (52 | ) |
Net cash used in investing activities | (435 | ) | | (371 | ) | (832 | ) | | (256 | ) |
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Financing activities | | | | | | |
Proceeds from borrowings | 1,000 |
| | 633 |
| 1,232 |
| | 80 |
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Payments on borrowings | (553 | ) | | (666 | ) | (757 | ) | | (486 | ) |
Cash dividends paid | (803 | ) | | (780 | ) | (907 | ) | | (864 | ) |
Exercise of employee stock options | 59 |
| | 60 |
| 40 |
| | 28 |
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Repurchase of shares | (789 | ) | | (567 | ) | (978 | ) | | (600 | ) |
Employee taxes paid from shares withheld | (21 | ) | | (18 | ) | (45 | ) | | (24 | ) |
Other - net | (8 | ) | | (5 | ) | (8 | ) | | (2 | ) |
Net cash used in financing activities | (1,115 | ) | | (1,343 | ) | (1,423 | ) | | (1,868 | ) |
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Effect of currency on cash | 11 |
| | 8 |
| 7 |
| | 52 |
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Total increase in cash | 248 |
| | 226 |
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Total increase (decrease) in cash | | 266 |
| | (234 | ) |
Cash at the beginning of the period | 543 |
| | 268 |
| 283 |
| | 561 |
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Cash at the end of the period | $ | 791 |
| | $ | 494 |
| $ | 549 |
| | $ | 327 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
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Note 1. | BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 20162018 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.
DuringLeases
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, Eaton uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. 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, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
Adoption of New Accounting Standards
Eaton adopted Accounting Standard Update 2016-02, Leases (Topic 842), and related amendments, in the first quarter of 2017,2019 using the optional transition method and has not restated prior periods. The Company adopted Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvementselected to Employee Share-Based Payment Accounting, (ASU 2016-09). Upon adoption,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 recorded deferred tax assets of $48 for all excess tax benefits that had not been previously recognized. This was accomplished through a cumulative-effect adjustment of less than $1 to retained earnings. ASU 2016-09 also requires that all excess tax benefits and deficiencies generated in the current and future periods be recorded as income tax benefit or expense in the reporting period in which they occur. These excess tax benefits and deficiencies, which were previously required to be presented as financing activities on the Company’s Condensed Consolidated Statements of Cash Flows, are now classified as operating activities prospectively. The Company also reclassified $21 and $18 for the first nine months of 2017 and 2016, respectively, from operating activities to financing activities on the Company’s Condensed Consolidated Statements of Cash Flows for withholding payments made to taxing authorities from shares withheld from employees. The Company will continue to estimate forfeitures as part of recording equity-based compensation expense.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This accounting standard supersedes all existing US GAAP revenue recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration which the company expects to collect in exchange for those goods or services. ASU 2014-09 will require additional disclosures in the notes to the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14). This accounting standard defers the effective date of ASU 2014-09 for one year and permits early adoptionearnings as of January 1, 2019. Additionally, the original effective date.
A cross-functional implementation team has been established consisting of representatives from all of our business segments to review current accounting policies and practices to identify potential differences that would result from applying the requirementsadoption of the new standard to revenue contracts.resulted in the recording of lease assets and lease liabilities for operating leases of $435 and $446, respectively, as of January 1, 2019. The implementation team performed a review of samples of customer contracts across the Company’s significant revenue streams. Based on this evaluationadoption of the revenue streams,standard did not have a material impact to the Company believes there will be little differenceConsolidated Statements of Income or Cash Flows.
Eaton adopted Accounting Standard Update 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, in revenue recorded under the current and new standards. Certain revenue streams will move from point-in-time or multiple elements to over time because of the continuous transfer of control to customers. The Company is also in the process of implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard, including evaluating new qualitative and quantitative disclosures that will include information on the nature, amount, timing and significant judgments impacting revenue from contracts with customers. Eaton plans to adopt the standard as of the first quarter of 20182019 using the modified retrospective approach for hedge instruments that existed at the date of adoption. ASU 2017-12 is intended to better align the Company's risk management activities with financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and will record a cumulative adjustmentreport hedge ineffectiveness, expands the ability to equity for open contracts ashedge specific risk components, and generally requires the change in value of January 1, 2018.
In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, Leases (Topic 842), (ASU 2016-02). This accounting standard requires that a lessee recognize a lease assethedge instrument and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. ASU 2016-02 will require additional disclosureshedged item to be presented in the notes tosame income statement line. The new disclosure requirements were applied on a prospective basis and comparative information has not been restated. The adoption of the standard did not have a material impact on the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2018. A project team has been formed to evaluate and implement the new standard, including the use of third-party lease accounting software. Eaton is evaluating the impact of ASU 2016-02 and an estimate of the impact to the consolidated financial statements cannot be made at this time.statements.
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Note 2. | SALEACQUISITIONS AND DIVESTITURES OF A BUSINESSBUSINESSES |
Acquired controlling interest of Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S.
On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, 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 markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 through July 2019 to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Systems and Services business segment.
Acquisition of Innovative Switchgear Solutions, Inc.
On July 31, 2017,19, 2019, Eaton soldacquired Innovative Switchgear Solutions, Inc. (ISG), a 50% interestspecialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. Its 2018 sales were approximately $18. ISG will be reported within the Electrical Systems and Services business segment.
Agreement to acquire Souriau-Sunbank Connection Technologies
On July 22, 2019, Eaton committed to acquire the Souriau-Sunbank Connection Technologies (Souriau-Sunbank) business of TransDigm Group Inc. for $920. Headquartered in its heavy-duty and medium-duty commercial vehicle automated transmission businessVersailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for $600 in cash to Cummins, Inc. The new joint venture is named Eaton Cummins Automated Transmission Technologies. 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% investmentharsh environments 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 Eatonaerospace, defense, industrial, energy, and transport markets. Its sales for the 50% interest sold12 months ended June 30, 2019 were $363. The purchase agreement was signed on October 28, 2019. The transaction is subject to Cummins, Inc.customary closing conditions and further supportedis expected to close by the end of 2019.
Sale of Lighting business
On March 1, 2019, Eaton announced it plans to pursue a discountedtax-free spin-off of its Lighting business. On October 15, 2019, Eaton entered into an agreement to sell its Lighting business to Signify N.V. for a cash flow model.purchase price of $1.4 billion. The decision to sell the Lighting business comes after completing a comprehensive review of various potential transaction alternatives. The Lighting business, which had sales of $1.7 billion in 2018 as part of the Electrical Products segment, serves customers in commercial, industrial, residential and municipal markets. Eaton will accountexpects the Lighting business to be classified as held for sale during the fourth quarter of 2019. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close in the first quarter of 2020.
Plan to divest Automotive Fluid Conveyance business
On March 1, 2019, Eaton announced it plans to sell its investment on the equity method of accounting.Automotive Fluid Conveyance business.
| |
Note 3. | ACQUISITION INTEGRATION AND DIVESTITURE CHARGES |
Eaton incurs integration charges related to acquired businesses, and transaction and other charges to divest and exit businesses. A summary of these charges follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
Electrical Products | $ | 4 |
| | $ | — |
| | $ | 6 |
| | $ | — |
|
Electrical Systems and Services | 3 |
| | — |
| | 4 |
| | — |
|
Corporate | 32 |
| | — |
| | 55 |
| | — |
|
Total acquisition integration and divestiture charges before income tax | 39 |
| | — |
| | 65 |
| | — |
|
Income taxes | 4 |
| | — |
| | 5 |
| | — |
|
Total after income taxes | $ | 35 |
| | $ | — |
| | $ | 60 |
| | $ | — |
|
Per ordinary share - diluted | $ | 0.08 |
| | $ | — |
| | $ | 0.14 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Electrical Products | $ | 1 |
| | $ | 1 |
| | $ | 3 |
| | $ | 2 |
|
Electrical Systems and Services | — |
| | — |
| | — |
| | 1 |
|
Total acquisition integration charges before income taxes | 1 |
| | 1 |
| | 3 |
| | 3 |
|
Income taxes | — |
| | — |
| | 1 |
| | 1 |
|
Total after income taxes | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 2 |
|
Per ordinary share - diluted | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Business segment acquisition integration charges in 20172019 related to the integrationplanned divestiture of Ephesusthe Lighting Inc. (Ephesus), which was acquired in 2015. The charges associated with Ephesus were included in Sellingbusiness and administrative expense. Business segment acquisition integration charges in 2016 related to the integrationacquisitions of EphesusUlusoy Elektrik and Oxalis Group Ltd. (Oxalis), which was acquired in 2015. The charges associated with EphesusISG, and 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.or Research and development expense. In Business Segment Information, the charges reduced Operating profit of the related business segment.
Corporate charges in 2019 are primarily related to the planned divestiture of the Lighting business and other charges to exit businesses, and were included in Selling and administrative expense and Other (income) expense-net. In Business Segment Information, the charges were included in Other corporate expense - net.
See Note 1415 for additional information about business segments.
| |
Note 4. | RESTRUCTURING CHARGESREVENUE RECOGNITION |
During 2015, Eaton announced its commitmentSales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to undertake actionsour customers. Sales are measured at the amount of consideration the Company expects to reduce its cost structurebe paid in all businessexchange for these products or services.
The Company’s 6 operating segments and at corporate. Restructuring charges incurred for the threefollowing tables disaggregate sales by lines of businesses, geographic destination, market channel or end market.
|
| | | | | | | | | | | |
| Three months ended September 30, 2019 |
Net sales | United States | | Rest of World | | Total |
Electrical Products | $ | 1,073 |
| | $ | 713 |
| | $ | 1,786 |
|
Electrical Systems and Services | 1,034 |
| | 538 |
| | 1,572 |
|
Hydraulics | 267 |
| | 336 |
| | 603 |
|
| | | | | |
| Original Equipment Manufacturers | | Aftermarket, Distribution and End User | | |
Aerospace | $ | 298 |
| | $ | 215 |
| | 513 |
|
| | | | | |
| Commercial | | Passenger and Light Duty | | |
Vehicle | $ | 371 |
| | $ | 390 |
| | 761 |
|
| | | | | |
eMobility | | | | | 79 |
|
| | | | | |
Total | | | | | $ | 5,314 |
|
|
| | | | | | | | | | | |
| Three months ended September 30, 2018 |
Net sales | United States | | Rest of World | | Total |
Electrical Products | $ | 1,055 |
| | $ | 734 |
| | $ | 1,789 |
|
Electrical Systems and Services | 1,000 |
| | 519 |
| | 1,519 |
|
Hydraulics | 301 |
| | 369 |
| | 670 |
|
| | | | | |
| Original Equipment Manufacturers | | Aftermarket, Distribution and End User | | |
Aerospace | $ | 269 |
| | $ | 209 |
| | 478 |
|
| | | | | |
| Commercial | | Passenger and Light Duty | | |
Vehicle | $ | 451 |
| | $ | 425 |
| | 876 |
|
| | | | | |
eMobility | | | | | 80 |
|
| | | | | |
Total | | | | | $ | 5,412 |
|
|
| | | | | | | | | | | |
| Nine months ended September 30, 2019 |
Net sales | United States | | Rest of World | | Total |
Electrical Products | $ | 3,235 |
| | $ | 2,160 |
| | $ | 5,395 |
|
Electrical Systems and Services | 3,059 |
| | 1,559 |
| | 4,618 |
|
Hydraulics | 863 |
| | 1,124 |
| | 1,987 |
|
| | | | | |
| Original Equipment Manufacturers | | Aftermarket, Distribution and End User | |
|
Aerospace | $ | 884 |
| | $ | 648 |
| | 1,532 |
|
| | | | |
|
| Commercial | | Passenger and Light Duty | |
|
Vehicle | $ | 1,227 |
| | $ | 1,147 |
| | 2,374 |
|
| | | | | |
eMobility | | | | | 246 |
|
|
| |
| |
|
Total | | | | | $ | 16,152 |
|
|
| | | | | | | | | | | |
| Nine months ended September 30, 2018 |
Net sales | United States | | Rest of World | | Total |
Electrical Products | $ | 3,048 |
| | $ | 2,279 |
| | $ | 5,327 |
|
Electrical Systems and Services | 2,877 |
| | 1,536 |
| | 4,413 |
|
Hydraulics | 907 |
| | 1,196 |
| | 2,103 |
|
| | | | | |
| Original Equipment Manufacturers | | Aftermarket, Distribution and End User | | |
Aerospace | $ | 799 |
| | $ | 600 |
| | 1,399 |
|
| | | | | |
| Commercial | | Passenger and Light Duty | | |
Vehicle | $ | 1,333 |
| | $ | 1,335 |
| | 2,668 |
|
| | | | | |
eMobility | | | | | 240 |
|
| | | | | |
Total | | | | | $ | 16,150 |
|
The timing of revenue recognition, billings and nine months endedcash 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 $3,384 and $3,402 at September 30, 2017,2019 and December 31, 2018, 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 $22$104 and $75,$94 at September 30, 2019 and December 31, 2018, respectively, and were $23are recorded in Prepaid expenses and $121 forother current assets. The increase in unbilled receivables was primarily due to revenue recognized and not yet billed, partially offset by billings to customers during the three and nine months ended September 30, 2016, respectively. The charges associated with restructuring activitiesquarter.
Changes in the deferred revenue liabilities are anticipated to be $100 in 2017.
A summary of restructuring charges by typeas follows:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Workforce reductions | $ | 10 |
| | $ | 18 |
| | $ | 35 |
| | $ | 95 |
|
Plant closings and other | 12 |
| | 5 |
| | 40 |
| | 26 |
|
Total | $ | 22 |
| | $ | 23 |
| | $ | 75 |
| | $ | 121 |
|
|
| | | |
| Deferred Revenue |
Balance at December 31, 2018 | $ | 248 |
|
Customer deposits and billings | 680 |
|
Revenue recognized in the period | (683 | ) |
Translation | 1 |
|
Balance at September 30, 2019 | $ | 246 |
|
|
| | | |
| Deferred Revenue |
Balance at January 1, 2018 | $ | 227 |
|
Customer deposits and billings | 696 |
|
Revenue recognized in the period | (676 | ) |
Translation | (6 | ) |
Balance at September 30, 2018 | $ | 241 |
|
A summarysignificant portion of restructuring chargesopen orders placed with Eaton are by segment follows: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 September 30, 2019 and December 31, 2018 was approximately $5.4 billion and $5.3 billion, respectively. At September 30, 2019 and December 31, 2018, Eaton expects to recognize approximately 86% and 87%, respectively, of this backlog in the next twelve months and the rest thereafter.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Electrical Products | $ | — |
| | $ | 1 |
| | $ | 14 |
| | $ | 27 |
|
Electrical Systems & Services | — |
| | 7 |
| | 7 |
| | 20 |
|
Hydraulics | 9 |
| | 10 |
| | 26 |
| | 44 |
|
Aerospace | — |
| | (1 | ) | | 1 |
| | 3 |
|
Vehicle | 2 |
| | 5 |
| | 7 |
| | 22 |
|
Corporate | 11 |
| | 1 |
| | 20 |
| | 5 |
|
Total | $ | 22 |
| | $ | 23 |
| | $ | 75 |
| | $ | 121 |
|
A summary of liabilities related to workforce reductions, plant closings and other associated costs announced in 2015 follows:
|
| | | | | | | | | | | |
| Workforce reductions | | Plant closings and other | | Total |
Balance at December 31, 2015 | $ | 54 |
| | $ | — |
| | $ | 54 |
|
Liability recognized | 177 |
| | 34 |
| | 211 |
|
Payments | (116 | ) | | (13 | ) | | (129 | ) |
Other adjustments | (2 | ) | | (20 | ) | | (22 | ) |
Balance at December 31, 2016 | 113 |
| | 1 |
| | 114 |
|
Liability recognized | 35 |
| | 40 |
| | 75 |
|
Payments | (78 | ) | | (25 | ) | | (103 | ) |
Other adjustments | (3 | ) | | (12 | ) | | (15 | ) |
Balance at September 30, 2017 | $ | 67 |
| | $ | 4 |
| | $ | 71 |
|
These charges were included in Cost of products sold, Selling and administrative expenses or Other income-net, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 14 for additional information about business segments.
Change in the carrying amount of goodwill by segment follows:
|
| | | | | | | | | | | | | | | |
| December 31, 2018 | | Additions | | Translation | | September 30, 2019 |
Electrical Products | $ | 6,562 |
| | $ | — |
| | $ | (97 | ) | | $ | 6,465 |
|
Electrical Systems and Services | 4,241 |
| | 164 |
| | (29 | ) | | 4,376 |
|
Hydraulics | 1,212 |
| | — |
| | (23 | ) | | 1,189 |
|
Aerospace | 941 |
| | — |
| | (3 | ) | | 938 |
|
Vehicle | 292 |
| | — |
| | (3 | ) | | 289 |
|
eMobility | 80 |
| | — |
| | — |
| | 80 |
|
Total | $ | 13,328 |
| | $ | 164 |
| | $ | (155 | ) | | $ | 13,337 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Electrical Products | | Electrical Systems and Services | | Hydraulics | | Aerospace | | Vehicle | | Total |
December 31, 2016 | | $ | 6,497 |
| | $ | 4,203 |
| | $ | 1,221 |
| | $ | 938 |
| | $ | 342 |
| | $ | 13,201 |
|
Goodwill written off from sale of business | | — |
| | — |
| | — |
| | — |
| | (52 | ) | | (52 | ) |
Translation | | 235 |
| | 114 |
| | 34 |
| | 8 |
| | 5 |
| | 396 |
|
September 30, 2017 | | $ | 6,732 |
| | $ | 4,317 |
| | $ | 1,255 |
| | $ | 946 |
| | $ | 295 |
| | $ | 13,545 |
|
The 2019 additions to goodwill relate to the anticipated synergies of acquiring Ulusoy Elektrik and ISG. The allocations of the purchase price from these acquisitions are preliminary and will be completed during the measurement period.
Eaton leases certain manufacturing facilities, warehouses, distribution centers, office space, vehicles and equipment. Most real estate leases contain renewal options. The exercise of lease renewal options is at the Company's sole discretion. The Company's lease agreements typically do not contain any significant guarantees of asset values at the end of a lease or restrictive covenants. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The components of lease expense follows:
|
| | | | | | | |
| Three months ended September 30, 2019 | | Nine months ended September 30, 2019 |
Operating lease cost | $ | 41 |
| | $ | 119 |
|
Finance lease cost: | | | |
Amortization of lease assets | 1 |
| | 3 |
|
Interest on lease liabilities | — |
| | 1 |
|
Short-term lease cost | 13 |
| | 40 |
|
Variable lease cost | 6 |
| | 17 |
|
Sublease income | (1 | ) | | (3 | ) |
Total lease cost | $ | 60 |
| | $ | 177 |
|
The net gain recorded on sale leaseback transactions for the nine months ended September 30, 2019 was $16.
Supplemental cash flow information related to leases follows:
|
| | | |
| Nine months ended September 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash outflows - payments on operating leases | $ | (118 | ) |
Operating cash outflows - interest payments on finance leases | (1 | ) |
Financing cash outflows - payments on finance lease obligations | (3 | ) |
| |
Lease assets obtained in exchange for new lease obligations: | |
Operating leases | $ | 95 |
|
Finance leases | 17 |
|
Supplemental balance sheet information related to leases follows:
|
| | | |
| September 30, 2019 |
Operating Leases | |
Operating lease assets | $ | 444 |
|
| |
Other current liabilities | 124 |
|
Operating lease liabilities | 333 |
|
Total operating lease liabilities | $ | 457 |
|
| |
Finance Leases | |
Land and buildings | $ | 16 |
|
Machinery and equipment | 17 |
|
Accumulated depreciation | (14 | ) |
Net property, plant and equipment | $ | 19 |
|
| |
Current portion of long-term debt | $ | 6 |
|
Long-term debt | 14 |
|
Total finance lease liabilities | $ | 20 |
|
| |
Weighted-average remaining lease term | |
Operating leases | 5.1 years |
|
Finance leases | 3.6 years |
|
| |
Weighted-average discount rate | |
Operating leases | 3.6 | % |
Finance leases | 5.9 | % |
Maturities of lease liabilities at September 30, 2019 follows:
|
| | | | | | | |
| Operating Leases | | Finance Leases |
2019 | $ | 40 |
| | $ | 2 |
|
2020 | 137 |
| | 7 |
|
2021 | 106 |
| | 6 |
|
2022 | 75 |
| | 4 |
|
2023 | 50 |
| | 3 |
|
Thereafter | 105 |
| | 1 |
|
Total lease payments | $ | 513 |
| | $ | 23 |
|
Less imputed interest | 56 |
| | 3 |
|
Total present value of lease liabilities | $ | 457 |
| | $ | 20 |
|
Note 6. DEBTA 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:
|
| | | |
| Operating Leases |
2019 | $ | 165 |
|
2020 | 133 |
|
2021 | 106 |
|
2022 | 75 |
|
2023 | 53 |
|
Thereafter | 110 |
|
Total lease commitments | $ | 642 |
|
On September 15, 2017,May 14, 2019, a subsidiary of Eaton issued senioreuro denominated notes (the(2019 Euro Notes) with a face amountvalue of $1,000.€1,100 ($1,232 based on the May 14, 2019 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2019 Euro Notes are comprised of two tranches of $700€600 and $300,€500, which mature in 20272021 and 2047,2025, respectively, with interest payable semi-annuallyannually at a respective rate of 3.1%0.02% and 3.9%0.70%. The issuer received proceeds totaling $993€1,097 ($1,229 based on the May 14, 2019 spot rate) from the issuance, net of financing costs.costs and discounts. The 2019 Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2019 Euro Notes contain customary optional redemption and par call provisions. The 2019 Euro Notes also contain a change of control provision which requires the Company to make an offer to purchase all or any part of the 2019 Euro 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 2019 Euro Notes. The 2019 Euro Notes are subject to customary non-financial covenants.
Note 7.8. RETIREMENT BENEFITS PLANS
The components of retirement benefits expense follow:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| | Three months ended September 30 |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost | $ | 22 |
| | $ | 25 |
| | $ | 14 |
| | $ | 16 |
| | $ | — |
| | $ | 1 |
|
| Interest cost | 35 |
| | 30 |
| | 13 |
| | 13 |
| | 3 |
| | 3 |
|
| Expected return on plan assets | (59 | ) | | (63 | ) | | (25 | ) | | (27 | ) | | — |
| | — |
|
| Amortization | 15 |
| | 24 |
| | 10 |
| | 9 |
| | (3 | ) | | (4 | ) |
| | 13 |
| | 16 |
| | 12 |
| | 11 |
| | — |
| | — |
|
| Settlements, curtailments and special termination benefits | 13 |
| | 13 |
| | 2 |
| | 1 |
| | — |
| | — |
|
| Total expense | $ | 26 |
| | $ | 29 |
| | $ | 14 |
| | $ | 12 |
| | $ | — |
| | $ | — |
|
| |
|
| | United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| | Nine months ended September 30 |
| | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Service cost | $ | 68 |
| | $ | 75 |
| | $ | 43 |
| | $ | 48 |
| | $ | 1 |
| | $ | 2 |
|
| Interest cost | 103 |
| | 91 |
| | 42 |
| | 40 |
| | 10 |
| | 10 |
|
| Expected return on plan assets | (176 | ) | | (190 | ) | | (79 | ) | | (80 | ) | | (1 | ) | | (2 | ) |
| Amortization | 46 |
| | 71 |
| | 29 |
| | 29 |
| | (10 | ) | | (10 | ) |
| | 41 |
| | 47 |
| | 35 |
| | 37 |
| | — |
| | — |
|
| Settlements, curtailments and special termination benefits | 36 |
| | 38 |
| | 3 |
| | 1 |
| | — |
| | — |
|
| Total expense | $ | 77 |
| | $ | 85 |
| | $ | 38 |
| | $ | 38 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| | Three months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | $ | 24 |
| | $ | 28 |
| | $ | 18 |
| | $ | 16 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | 30 |
| | 31 |
| | 14 |
| | 16 |
| | 4 |
| | 4 |
|
| Expected return on plan assets | (61 | ) | | (63 | ) | | (24 | ) | | (23 | ) | | (1 | ) | | (2 | ) |
| Amortization | 21 |
| | 23 |
| | 13 |
| | 8 |
| | (3 | ) | | (2 | ) |
| | 14 |
| | 19 |
| | 21 |
| | 17 |
| | 1 |
| | 1 |
|
| Settlements | 17 |
| | 24 |
| | 4 |
| | — |
| | — |
| | — |
|
| Total expense | $ | 31 |
| | $ | 43 |
| | $ | 25 |
| | $ | 17 |
| | $ | 1 |
| | $ | 1 |
|
| |
|
| | United States pension benefit expense | | Non-United States pension benefit expense | | Other postretirement benefits expense |
| | Nine months ended September 30 |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | $ | 72 |
| | $ | 83 |
| | $ | 53 |
| | $ | 49 |
| | $ | 2 |
| | $ | 3 |
|
| Interest cost | 92 |
| | 94 |
| | 41 |
| | 48 |
| | 11 |
| | 13 |
|
| Expected return on plan assets | (183 | ) | | (188 | ) | | (70 | ) | | (71 | ) | | (3 | ) | | (5 | ) |
| Amortization | 62 |
| | 69 |
| | 38 |
| | 25 |
| | (9 | ) | | (6 | ) |
| | 43 |
| | 58 |
| | 62 |
| | 51 |
| | 1 |
| | 5 |
|
| Settlements and special termination benefits | 51 |
| | 63 |
| | 4 |
| | — |
| | — |
| | — |
|
| Total expense | $ | 94 |
| | $ | 121 |
| | $ | 66 |
| | $ | 51 |
| | $ | 1 |
| | $ | 5 |
|
The components of retirement benefits expense other than service costs are included in Other (income) expense - net.
In 2017, Eaton expects to make contributions to the United States pension plans of $375, including $370 contributed through September 30, 2017.
| |
Note 8.9. | LEGAL CONTINGENCIES |
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
In December 2011, Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) filed an action against (a) Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively, “Cooper”), (b) M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc. (collectively, “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust (the “Trust”) in Texas state court. Pepsi alleged that it was harmed by a 2011 settlement agreement (“2011 Settlement”) among Cooper, Mafco, and Pneumo Abex, LLC (“Pneumo,” which prior to the 2011 Settlement was a Mafco subsidiary), which settlement resolved litigation that Pneumo had previously brought against Cooper involving, among other things, a guaranty related to Pneumo’s friction products business. In November 2015, after a Texas court ruled that Pepsi's claims should be heard in arbitration, Pepsi filed a demand for arbitration against Cooper, Mafco, the Trust, and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts have opined, among other things, that the value contributed to the Trust for a release of the guaranty was approximately $440 below reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities maycould result in plaintiffs suing Pepsi under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts opineopined that Pepsi hashad no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations under the guaranty. The Company believesarbitration proceedings closed in December 2017. On July 11, 2018, the arbitration panel made certain findings and concluded that the claimsvalue contributed to the Trust did not constitute reasonably equivalent value, but ordered the parties to recalculate the amount that should have been contributed to the Trust as of the date of the 2011 transaction. Based on the findings made by the panel and the recalculation ordered by the panel, Cooper believed that no additional amount should be contributed. Pepsi are without merit,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 ultimate resolutioncourt vacate the award on various grounds, including that Cooper was prejudiced by the conduct of this matter will not havethe proceedings, the panel exceeded its powers, and because the panel denied Cooper a material impact onfull and fair opportunity to present certain evidence. The court confirmed the Company’s consolidated financial statements.
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia,award at the confirmation hearing, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. The judgment was basedheld on an alleged violation of an agency agreement between Raysul and Saturnia. At March 31, 2016,October 12, 2018. On November 2, 2018, the Company had a total accrual of 100 Brazilian Reais relatedappealed. On November 28, 2018, the Company paid $297, the full judgment plus accrued post-judgment interest, to this matter ($31 based on June 2016 exchange rates). In June 2016, Eaton signed a settlement agreementPneumo Abex and resolvedpreserved its rights, including to appeal. On April 25, 2019, the matter, which did not have a material impact on the consolidated financial statements.appeal that Cooper filed was dismissed.
The effective income tax rate for the third quarter and the first nine months of 20172019 was expense of 17.3%16.0% and 13.9%, respectively,14.5% compared to expense of 8.8%5.2% and 9.6%10.8% for the third quarter and first nine months of 2016. The tax rate for the third quarter and first nine months of 2017 includes $234 of tax expense on the gain related to the Eaton Cummins joint venture transaction, which closed during the third quarter and is discussed in Note 2. Excluding the impact from the Eaton Cummins joint venture transaction, the effective income tax rate for the third quarter and first nine months of 2017 was expense of 9.5% and 8.8%, respectively.2018. The increase in the effective tax rate in the third quarter and first nine months of 20172019 was primarily due to the inclusion of $69 of tax benefit on the arbitration decision expense recorded during the third quarter of 2018 (discussed in Note 9), as well as greater levels of income in higher tax jurisdictions. The decrease in the effective tax rate in the first nine months of 2017 was due to the resolution of tax contingencies in lower tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of ASU 2016-09 as discussed in Note 1.
On July 26, 2017, the United States Tax Court issued a ruling in the previously-disclosed dispute between Eaton Corporation, a subsidiary of the Company (“Eaton Corp”) and the Internal Revenue Service (the “IRS”).
As the Company has previously disclosed, the IRS issuedEaton's United States subsidiaries ("Eaton US") received a Notice in 20112014 from the Internal Revenue Service ("IRS") for Eaton Corp’s 2005 and 2006 tax years proposing2007 through 2010 which included proposed assessments involving two issues: the recognition of $75 million in additional taxes plus $52 million in penalties related primarily toincome for several of Eaton US's controlled foreign corporations, and transfer pricing adjustments for products manufactured in Eatonthe Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S.United States. The Company believed the proposed assessments were without merit and contested both matters in the United States Tax Court ("Tax Court"). Eaton US and the IRS both moved for partial summary judgment on the controlled foreign corporation income recognition 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 partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The Company believes that it will be successful on appeal and has not recorded any additional impact of the Tax Court's decision in its consolidated financial statements. As previously disclosed, the IRS also proposed adjustments related to the same transfer pricing issue in another Notice issued in 2014 for the 2007 through 2010 tax years. Eaton has set its transfer prices for products sold between these affiliates at the same prices that it sells such products to third parties, as required by two successive Advance Pricing Agreements (APAs) Eaton Corp entered into with the IRS. The IRS cancelled the APAs and made the proposed adjustmentsincluded in the 2011 and 2014 Notices, which Eaton Corp disputedNotice remains unresolved at this point. The total potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition issue is not estimable until all matters in the Tax Court. The Tax Court case involved both whether the APAs should be enforced and, if not, the appropriate transfer pricing methodology. The Tax Court held a trial for the 2005 and 2006open tax years the outcome of which also applies to the transfer pricing matter in the 2007 through 2010 tax years.
The Tax Court agreed with Eaton Corp that the IRS must abide by the terms of the APAs for the tax years 2005-2006, a finding that is also applicable to the 2007-2010 years. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements.
been resolved.
Note 10.11. EQUITY
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 the first quarter of 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 approvedadopted a new share repurchase program for share repurchases up to $2,500 of ordinary shares (2016 Program). During the nine months ended September 30, 2018, 7.7 million ordinary shares were repurchased under the 2016 Program in the open market at a total cost of $600. No ordinary shares were repurchased during the three months ended September 30, 2018. On February 27, 2019, the Board of Directors adopted a new share repurchase program for share repurchases up to $5,000 of ordinary shares (2019 Program). Under the 20162019 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During the three and nine months ended September 30, 2017, 4.42019, 6.8 million and 10.711.9 million ordinary shares, respectively, were repurchased under the 20162019 Program in the open market at a total cost of $324$539 and $789, respectively. During the three and nine months ended September 30, 2016, 3.7 million and 7.7 million ordinary shares, respectively, were repurchased under the 2016 Program in the open market at a total cost of $243 and $485,$949, respectively.
The changes in Shareholders’ equity follow:
|
| | | | | | | | | | | |
| Eaton shareholders’ equity | | Noncontrolling interests | | Total equity |
Balance at December 31, 2016 | $ | 14,897 |
| | $ | 44 |
| | $ | 14,941 |
|
Cumulative-effect adjustment upon adoption of ASU 2016-09 | 48 |
| | — |
| | 48 |
|
Net income | 2,346 |
| | 1 |
| | 2,347 |
|
Other comprehensive income | 785 |
| | — |
| | 785 |
|
Cash dividends paid | (803 | ) | | (3 | ) | | (806 | ) |
Issuance of shares under equity-based compensation plans - net | 109 |
| | — |
| | 109 |
|
Repurchase of shares | (789 | ) | | — |
| | (789 | ) |
Changes in noncontrolling interest - net | — |
| | 1 |
| | 1 |
|
Balance at September 30, 2017 | $ | 16,593 |
| | $ | 43 |
| | $ | 16,636 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary shares | | Capital in excess of par value | | Retained earnings | | Accumulated other comprehensive loss | | Shares held in trust | | Total Eaton shareholders' equity | | Noncontrolling interests | | Total equity |
| | | | | | | |
(In millions) | Shares | | Dollars | | | | | | | |
Balance at December 31, 2018 | 423.6 |
| | $ | 4 |
| | $ | 12,090 |
| | $ | 8,161 |
| | $ | (4,145 | ) | | $ | (3 | ) | | $ | 16,107 |
| | $ | 35 |
| | $ | 16,142 |
|
Net income | — |
| | — |
| | — |
| | 522 |
| | — |
| | — |
| | 522 |
| | — |
| | 522 |
|
Other comprehensive income, net of tax | | | | | | | | | 67 |
| | | | 67 |
| | — |
| | 67 |
|
Cash dividends paid and accrued | — |
| | — |
| | — |
| | (309 | ) | | — |
| | — |
| | (309 | ) | | (1 | ) | | (310 | ) |
Issuance of shares under equity-based compensation plans | 1.4 |
| | — |
| | (5 | ) | | 1 |
| | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
Repurchase of shares | (1.9 | ) | | — |
| | — |
| | (150 | ) | | — |
| | — |
| | (150 | ) | | — |
| | (150 | ) |
Balance at March 31, 2019 | 423.1 |
| | $ | 4 |
| | $ | 12,085 |
| | $ | 8,225 |
| | $ | (4,078 | ) | | $ | (3 | ) | | $ | 16,233 |
| | $ | 34 |
| | $ | 16,267 |
|
Net income | — |
| | — |
| | — |
| | 636 |
| | — |
| | — |
| | 636 |
| | — |
| | 636 |
|
Other comprehensive loss, net of tax | | | | | | | | | (30 | ) | | | | (30 | ) | | | | (30 | ) |
Cash dividends paid | — |
| | — |
| | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) | | (1 | ) | | (301 | ) |
Issuance of shares under equity-based compensation plans | 0.1 |
| | — |
| | 27 |
| | (1 | ) | | — |
| | 1 |
| | 27 |
| | — |
| | 27 |
|
Acquisition of a business | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
| | 51 |
|
Acquisition of noncontrolling interest obtained through tender offer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (29 | ) | | (29 | ) |
Repurchase of Shares | (3.2 | ) | | — |
| | — |
| | (260 | ) | | — |
| | — |
| | (260 | ) | | — |
| | (260 | ) |
Balance at June 30, 2019 | 420.0 |
| | $ | 4 |
| | $ | 12,112 |
| | $ | 8,300 |
| | $ | (4,108 | ) | | $ | (2 | ) | | $ | 16,306 |
| | $ | 55 |
| | $ | 16,361 |
|
Net income | — |
| | — |
| | — |
| | 601 |
| | — |
| | — |
| | 601 |
| | 1 |
| | 602 |
|
Other comprehensive loss, net of tax | | | | | | | | | (259 | ) | | | | (259 | ) | | | | (259 | ) |
Cash dividends paid | — |
| | — |
| | — |
| | (298 | ) | | — |
| | — |
| | (298 | ) | | — |
| | (298 | ) |
Issuance of shares under equity-based compensation plans | 0.2 |
| | — |
| | 39 |
| | (2 | ) | | — |
| | — |
| | 37 |
| | — |
| | 37 |
|
Acquisition of noncontrolling interest obtained through tender offer | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4 | ) | | (4 | ) |
Repurchase of Shares | (6.8 | ) | | — |
| | — |
| | (539 | ) | | — |
| | — |
| | (539 | ) | | — |
| | (539 | ) |
Balance at September 30, 2019 | 413.4 |
| | $ | 4 |
| | $ | 12,151 |
| | $ | 8,062 |
| | $ | (4,367 | ) | | $ | (2 | ) | | $ | 15,848 |
| | $ | 52 |
| | $ | 15,900 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ordinary shares | | Capital in excess of par value | | Retained earnings | | Accumulated other comprehensive loss | | Shares held in trust | | Total Eaton shareholders' equity | | Noncontrolling interests | | Total equity |
| | | | | | | |
(In millions) | Shares | | Dollars | | | | | | | |
Balance at December 31, 2017 | 439.9 |
| | $ | 4 |
| | $ | 11,987 |
| | $ | 8,669 |
| | $ | (3,404 | ) | | $ | (3 | ) | | $ | 17,253 |
| | $ | 37 |
| | $ | 17,290 |
|
Cumulative-effect adjustment upon adoption of ASU 2014-09 | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) | | — |
| | (2 | ) |
Cumulative-effect adjustment upon adoption of ASU 2016-16 | — |
| | — |
| | — |
| | (199 | ) | | — |
| | — |
| | (199 | ) | | — |
| | (199 | ) |
Net income | — |
| | — |
| | — |
| | 488 |
| | — |
| | — |
| | 488 |
| | (1 | ) | | 487 |
|
Other comprehensive income, net of tax |
| |
| |
| |
| | 296 |
| |
| | 296 |
| | — |
| | 296 |
|
Cash dividends paid and accrued | — |
| | — |
| | — |
| | (290 | ) | | — |
| | — |
| | (290 | ) | | — |
| | (290 | ) |
Issuance of shares under equity-based compensation plans | 1.1 |
| | — |
| | 18 |
| | (1 | ) | | — |
| | — |
| | 17 |
| | — |
| | 17 |
|
Changes in noncontrolling interest of consolidated subsidiaries - net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
Repurchase of shares | (3.7 | ) | | — |
| | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) | | — |
| | (300 | ) |
Balance at March 31, 2018 | 437.3 |
| | $ | 4 |
| | $ | 12,005 |
| | $ | 8,365 |
| | $ | (3,108 | ) | | $ | (3 | ) | | $ | 17,263 |
| | $ | 38 |
| | $ | 17,301 |
|
Net income | — |
| | — |
| | — |
| | 610 |
| | — |
| | — |
| | 610 |
| | 1 |
| | 611 |
|
Other comprehensive loss, net of tax | — |
| | | | | | | | (624 | ) | | | | (624 | ) | | | | (624 | ) |
Cash dividends paid | — |
| | — |
| | — |
| | (288 | ) | | — |
| | — |
| | (288 | ) | | (1 | ) | | (289 | ) |
Issuance of shares under equity-based compensation plans | — |
| | — |
| | 28 |
| | — |
| | — |
| | 1 |
| | 29 |
| | — |
| | 29 |
|
Changes in noncontrolling interest of consolidated subsidiaries - net | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3 | ) | | (3 | ) |
Repurchase of Shares | (4.0 | ) | | — |
| | — |
| | (300 | ) | | — |
| | — |
| | (300 | ) | | — |
| | (300 | ) |
Balance at June 30, 2018 | 433.3 |
| | $ | 4 |
| | $ | 12,033 |
| | $ | 8,387 |
| | $ | (3,732 | ) | | $ | (2 | ) | | $ | 16,690 |
| | $ | 35 |
| | $ | 16,725 |
|
Net income | — |
| | — |
| | — |
| | 416 |
| | — |
| | — |
| | 416 |
| | — |
| | 416 |
|
Other comprehensive loss, net of tax |
| |
| |
| |
| | (98 | ) | | — |
| | (98 | ) | | — |
| | (98 | ) |
Cash dividends paid | — |
| | — |
| | — |
| | (286 | ) | | — |
| | — |
| | (286 | ) | | — |
| | (286 | ) |
Issuance of shares under equity-based compensation plans | 0.1 |
| | — |
| | 33 |
| | — |
| | — |
| | (1 | ) | | 32 |
| | — |
| | 32 |
|
Balance at September 30, 2018 | 433.4 |
| | $ | 4 |
| | $ | 12,066 |
| | $ | 8,517 |
| | $ | (3,830 | ) | | $ | (3 | ) | | $ | 16,754 |
| | $ | 35 |
| | $ | 16,789 |
|
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, 2018 | $ | (2,864 | ) | | $ | (1,278 | ) | | $ | (3 | ) | | $ | (4,145 | ) |
Other comprehensive (loss) income before reclassifications | (235 | ) | | 7 |
| | (72 | ) | | (300 | ) |
Amounts reclassified from Accumulated other comprehensive loss | — |
| | 81 |
| | (3 | ) | | 78 |
|
Net current-period Other comprehensive (loss) income | (235 | ) | | 88 |
| | (75 | ) | | (222 | ) |
Balance at September 30, 2019 | $ | (3,099 | ) | | $ | (1,190 | ) | | $ | (78 | ) | | $ | (4,367 | ) |
|
| | | | | | | | | | | | | | | |
| Currency translation and related hedging instruments | | Pensions and other postretirement benefits | | Cash flow hedges | | Total |
Balance at December 31, 2016 | $ | (3,062 | ) | | $ | (1,380 | ) | | $ | (6 | ) | | $ | (4,448 | ) |
Other comprehensive (loss) income before reclassifications | 743 |
| | (46 | ) | | (19 | ) | | 678 |
|
Amounts reclassified from Accumulated other comprehensive loss (income) | — |
| | 99 |
| | 8 |
| | 107 |
|
Net current-period Other comprehensive income (loss) | 743 |
| | 53 |
| | (11 | ) | | 785 |
|
Balance at September 30, 2017 | $ | (2,319 | ) | | $ | (1,327 | ) | | $ | (17 | ) | | $ | (3,663 | ) |
The reclassifications out of Accumulated other comprehensive loss follow:
|
| | | | | |
| Nine months ended September 30, 2019 | | Consolidated statements of income classification |
Amortization of defined benefit pensions and other postretirement benefits items | | | |
Actuarial loss and prior service cost | $ | (104 | ) | 1 | |
Tax benefit | 23 |
| | |
Total, net of tax | (81 | ) | | |
| | | |
Gains and (losses) on cash flow hedges | | | |
Currency exchange contracts | 4 |
| | Net sales and Cost of products sold |
Tax expense | (1 | ) | | |
Total, net of tax | 3 |
| | |
| | | |
Total reclassifications for the period | $ | (78 | ) | | |
|
| | | | | |
| Nine months ended September 30, 2017 | | Consolidated statements of income classification |
Amortization of defined benefit pensions and other postretirement benefits items | | | |
Actuarial loss and prior service cost | $ | (146 | ) | 1 | |
Tax benefit | 47 |
| | |
Total, net of tax | (99 | ) | | |
| | | |
Gains and (losses) on cash flow hedges | | | |
Currency exchange contracts | (12 | ) | | Cost of products sold |
Tax benefit | 4 |
| | |
Total, net of tax | (8 | ) | | |
| | | |
Total reclassifications for the period | $ | (107 | ) | | |
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 78 for additional information about 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:
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Shares in millions) | 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to Eaton ordinary shareholders | $ | 601 |
| | $ | 416 |
| | $ | 1,759 |
| | $ | 1,514 |
|
| | | | | | | |
Weighted-average number of ordinary shares outstanding - diluted | 418.4 |
| | 436.3 |
| | 422.5 |
| | 438.4 |
|
Less dilutive effect of equity-based compensation | 1.8 |
| | 2.8 |
| | 1.8 |
| | 2.6 |
|
Weighted-average number of ordinary shares outstanding - basic | 416.6 |
| | 433.5 |
| | 420.7 |
| | 435.8 |
|
| | | | | | | |
Net income per share attributable to Eaton ordinary shareholders | | | | | | | |
Diluted | $ | 1.44 |
| | $ | 0.95 |
| | $ | 4.16 |
| | $ | 3.45 |
|
Basic | 1.44 |
| | 0.96 |
| | 4.18 |
| | 3.47 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
(Shares in millions) | 2017 | | 2016 | | 2017 | | 2016 |
Net income attributable to Eaton ordinary shareholders | $ | 1,399 |
| | $ | 523 |
| | $ | 2,346 |
| | $ | 1,418 |
|
| | | | | | | |
Weighted-average number of ordinary shares outstanding - diluted | 445.2 |
| | 455.6 |
| | 448.3 |
| | 457.9 |
|
Less dilutive effect of equity-based compensation | 2.6 |
| | 1.7 |
| | 2.4 |
| | 1.4 |
|
Weighted-average number of ordinary shares outstanding - basic | 442.6 |
| | 453.9 |
| | 445.9 |
| | 456.5 |
|
| | | | | | | |
Net income per share attributable to Eaton ordinary shareholders | | | | | | | |
Diluted | $ | 3.14 |
| | $ | 1.15 |
| | $ | 5.23 |
| | $ | 3.09 |
|
Basic | 3.16 |
| | 1.15 |
| | 5.26 |
| | 3.10 |
|
For the third quarter and first nine months of 2017, 0.22019, 0.8 million and 0.61.1 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive. For the third quarter and first nine months of 2016, 1.52018, 0.5 million and 1.80.4 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.
| |
Note 11.12. | FAIR VALUE MEASUREMENTS |
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2019 | | | | | | | |
Cash | $ | 549 |
| | $ | 549 |
| | $ | — |
| | $ | — |
|
Short-term investments | 281 |
| | 281 |
| | — |
| | — |
|
Net derivative contracts | (52 | ) | | — |
| | (52 | ) | | — |
|
| | | | | | | |
December 31, 2018 | | | | | | | |
Cash | $ | 283 |
| | $ | 283 |
| | $ | — |
| | $ | — |
|
Short-term investments | 157 |
| | 157 |
| | — |
| | — |
|
Net derivative contracts | 14 |
| | — |
| | 14 |
| | — |
|
|
| | | | | | | | | | | | | | | |
| Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017 | | | | | | | |
Cash | $ | 791 |
| | $ | 791 |
| | $ | — |
| | $ | — |
|
Short-term investments | 843 |
| | 843 |
| | — |
| | — |
|
Net derivative contracts | 28 |
| | — |
| | 28 |
| | — |
|
| | | | | | | |
December 31, 2016 | | | | | | | |
Cash | $ | 543 |
| | $ | 543 |
| | $ | — |
| | $ | — |
|
Short-term investments | 203 |
| | 203 |
| | — |
| | — |
|
Net derivative contracts | (3 | ) | | — |
| | (3 | ) | | — |
|
Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were measured using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $8,767$8,019 and fair value of $9,078$8,600 at September 30, 20172019 compared to $8,263$7,107 and $8,477,$7,061, respectively, at December 31, 2016.2018. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities, and are considered a Level 2 fair value measurement.
As discussed in Note 2, on July 31, 2017 Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission business to Cummins, Inc. Eaton's remaining 50% interest was remeasured to a fair value of $600 on July 31, 2017 using a discounted cash flow model which is considered a Level 3 fair value measurement. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. Eaton will account for its investment on the equity method of accounting.
| |
Note 12.13. | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES |
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, to a lesser extent, commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive lossincome and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive lossincome and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The changecash flows resulting from these financial instruments are classified in fair valueoperating activities on the Condensed Consolidated Statements of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. 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 a non-derivative net investment hedging instruments on an after-tax basis was $89 at September 30, 2017 and $86 at December 31, 2016, and designatedinstrument had a carrying value on a pre-tax basis was $643of $1,788 at September 30, 20172019 and $572$623 at December 31, 2016.2018.
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Other current assets | | Other noncurrent assets | | Other current liabilities | | Other noncurrent liabilities | | Type of hedge | | Term |
September 30, 2019 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 2,225 |
| | $ | — |
| | $ | 71 |
| | $ | — |
| | $ | — |
| | Fair value | | 15 months to 16 years |
Forward starting floating-to-fixed interest rate swaps | 500 |
| | — |
| | 1 |
| | — |
| | 77 |
| | Cash flow | | 14 to 34 years |
Currency exchange contracts | 1,104 |
| | 11 |
| | — |
| | 17 |
| | 14 |
| | Cash flow | | 1 to 36 months |
Commodity contracts | 11 |
| | — |
| | — |
| | — |
| | — |
| | Cash flow | | 1 to 7 months |
Total | | | $ | 11 |
| | $ | 72 |
| | $ | 17 |
| | $ | 91 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 4,364 |
| | $ | 14 |
| | | | $ | 41 |
| | | | | | 1 to 12 months |
Total | | | $ | 14 |
| |
|
| | $ | 41 |
| |
|
| | | | |
| | | | | | | | | | | | | |
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 | 100 |
| | — |
| | — |
| | — |
| | 3 |
| | Cash flow | | 34 years |
Currency exchange contracts | 951 |
| | 19 |
| | 2 |
| | 11 |
| | 8 |
| | Cash flow | | 1 to 36 months |
Total | | | $ | 19 |
| | $ | 24 |
| | $ | 12 |
| | $ | 37 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 3,886 |
| | $ | 40 |
| | | | $ | 20 |
| | | | | | 1 to 12 months |
Total | | | $ | 40 |
| |
|
| | $ | 20 |
| |
|
| | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Notional amount | | Other current assets | | Other noncurrent assets | | Other current liabilities | | Other noncurrent liabilities | | Type of hedge | | Term |
September 30, 2017 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 3,715 |
| | $ | 2 |
| | $ | 56 |
| | $ | — |
| | $ | 7 |
| | Fair value | | 2 months to 17 years |
Currency exchange contracts | 921 |
| | 4 |
| | 6 |
| | 25 |
| | 5 |
| | Cash flow | | 1 to 36 months |
Total | | | $ | 6 |
| | $ | 62 |
| | $ | 25 |
| | $ | 12 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 3,022 |
| | $ | 21 |
| | | | $ | 24 |
| | | | | | 1 to 12 months |
Commodity contracts | 1 |
| | — |
| | | | — |
| | | | | | 1 to 12 months |
Total | | | $ | 21 |
| |
|
| | $ | 24 |
| |
|
| | | | |
| | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
Derivatives designated as hedges | | | | | | | | | | | | | |
Fixed-to-floating interest rate swaps | $ | 3,765 |
| | $ | 1 |
| | $ | 65 |
| | $ | — |
| | $ | 8 |
| | Fair value | | 3 months to 18 years |
Forward starting floating-to-fixed interest rate swaps | 450 |
| | — |
| | 19 |
| | — |
| | 1 |
| | Cash flow | | 11 years |
Currency exchange contracts | 802 |
| | 11 |
| | 1 |
| | 22 |
| | 17 |
| | Cash flow | | 1 to 36 months |
Total | | | $ | 12 |
| | $ | 85 |
| | $ | 22 |
| | $ | 26 |
| | | | |
| | | | | | | | | | | | | |
Derivatives not designated as hedges | | | | | | | | | | | | | |
Currency exchange contracts | $ | 5,333 |
| | $ | 31 |
| | | | $ | 85 |
| | | | | | 1 to 12 months |
Commodity contracts | 10 |
| | 2 |
| | | | — |
| | | | | | 1 to 12 months |
Total | | | $ | 33 |
| |
|
| | $ | 85 |
| |
|
| | | | |
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 salesreceivables, 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 of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts.
As of September 30, 2019, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
|
| | | | | |
| | September 30, 2019 | | |
Commodity | | (millions of pounds) | | Term |
Copper | | 4 |
| | 1 to 7 months |
The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
|
| | | | | | | |
| Carrying amount of the hedged assets (liabilities) | | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged asset (liabilities) (a) |
Location on Consolidated Balance Sheets | September 30, 2019 | | September 30, 2019 |
Long-term debt | $ | (2,838 | ) | | $ | (112 | ) |
(a) At September 30, 2019, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $41.
The impact of hedging activities to the Consolidated Statements of Income are as follow:
|
| | | | | | | | | | | |
| Three months ended September 30, 2019 |
| Net Sales | | Cost of products sold | | Interest expense - net |
Amounts from Consolidated Statements of Income | $ | 5,314 |
| | $ | 3,512 |
| | $ | 54 |
|
| | | | | |
Gain (loss) on derivatives designated as cash flow hedges | | | | | |
Currency exchange contracts | | | | | |
Hedged item | $ | 1 |
| | $ | (1 | ) | | $ | — |
|
Derivative designated as hedging instrument | (1 | ) | | 1 |
| | — |
|
| | | | | |
Commodity contracts | | | | | |
Hedged item | $ | — |
| | $ | — |
| | $ | — |
|
Derivative designated as hedging instrument | — |
| | — |
| | — |
|
| | | | | |
Gain (loss) on derivatives designated as fair value hedges | | | | | |
Fixed-to-floating interest rate swaps | | | | | |
Hedged item | $ | — |
| | $ | — |
| | $ | (13 | ) |
Derivative designated as hedging instrument | — |
| | — |
| | 13 |
|
|
| | | | | | | | | | | |
| Nine months ended September 30, 2019 |
| Net Sales | | Cost of products sold | | Interest expense - net |
Amounts from Consolidated Statements of Income | $ | 16,152 |
| | $ | 10,782 |
| | $ | 183 |
|
| | | | | |
Gain (loss) on derivatives designated as cash flow hedges | | | | | |
Currency exchange contracts | | | | | |
Hedged item | $ | 6 |
| | $ | (10 | ) | | $ | — |
|
Derivative designated as hedging instrument | (6 | ) | | 10 |
| | — |
|
| | | | | |
Commodity contracts | | | | | |
Hedged item | $ | — |
| | $ | — |
| | $ | — |
|
Derivative designated as hedging instrument | — |
| | — |
| | — |
|
| | | | | |
Gain (loss) on derivatives designated as fair value hedges | | | | | |
Fixed-to-floating interest rate swaps | | | | | |
Hedged item | $ | — |
| | $ | — |
| | $ | (76 | ) |
Derivative designated as hedging instrument | — |
| | — |
| | 76 |
|
The impact of derivatives not designated as hedges to the Consolidated Statements of Income are as follow:
|
| | | | | |
| Gain (loss) recognized in Consolidated Statements of Income | | Consolidated Statements of Income classification |
| Three months ended September 30 | | |
| 2019 | | |
Gain (loss) on derivatives not designated as hedges | | | |
Currency exchange contracts | $ | (40 | ) | | Other expense - net |
Commodity Contracts | 1 |
| | Cost of products sold |
Total | $ | (39 | ) | | |
| | | |
| Gain (loss) recognized in Consolidated Statements of Income | | Consolidated Statements of Income classification |
| Nine months ended September 30 | | |
| 2019 | | |
Gain (loss) on derivatives not designated as hedges | | | |
Currency exchange contracts | $ | 8 |
| | Other income - net |
Commodity Contracts | 1 |
| | Cost of products sold |
Total | $ | 9 |
| | |
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated StatementStatements of Income and Comprehensive Income follow:
|
| | | | | | | | | | | | | | | | | |
| Gain (loss) recognized in other comprehensive (loss) income | | Location of gain (loss) reclassified from Accumulated other comprehensive loss | | Gain (loss) reclassified from Accumulated other comprehensive loss |
| Three months ended September 30 | | | | Three months ended September 30 |
| 2019 | | 2018 | | | | 2019 | | 2018 |
Derivatives designated as cash flow hedges | | | | | | | | | |
Forward starting floating-to-fixed interest rate swaps | $ | (46 | ) | | $ | — |
| | Interest expense - net | | $ | — |
| | $ | — |
|
Currency exchange contracts | (8 | ) | | (12 | ) | | Net sales and Cost of products sold | | — |
| | (4 | ) |
Commodity contracts | — |
| | — |
| | Cost of products sold | | — |
| | — |
|
Non-derivative designated as net investment hedges | | | | | | | | | |
Foreign currency denominated debt | 3 |
| | 5 |
| | Other income - net | | — |
| | — |
|
Total | $ | (51 | ) | | $ | (7 | ) | | | | $ | — |
| | $ | (4 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) recognized in other comprehensive (loss) income | | Location of gain (loss) reclassified from Accumulated other comprehensive loss | | Gain (loss) reclassified from Accumulated other comprehensive loss |
| Nine months ended September 30 | | | | Nine months ended September 30 |
| 2019 | | 2018 | | | | 2019 | | 2018 |
Derivatives designated as cash flow hedges | | | | | | | | | |
Forward starting floating-to-fixed interest rate swaps | $ | (73 | ) | | $ | — |
| | Interest expense - net | | $ | — |
| | $ | — |
|
Currency exchange contracts | (18 | ) | | (14 | ) | | Net sales and Cost of products sold | | 4 |
| | (12 | ) |
Commodity contracts | — |
| | — |
| | Cost of products sold | | — |
| | — |
|
Non-derivative designated as net investment hedges | | | | | | | | | |
Foreign currency denominated debt | 15 |
| | 22 |
| | Other income - net | | — |
| | — |
|
Total | $ | (76 | ) |
| $ | 8 |
|
|
|
| $ | 4 |
|
| $ | (12 | ) |
|
| | | | | | | | | | | | | | | | | |
| Gain (loss) recognized in other comprehensive (loss) income | | Location of gain (loss) reclassified from Accumulated other comprehensive loss | | Gain (loss) reclassified from Accumulated other comprehensive loss |
| Three months ended September 30 | | | | Three months ended September 30 |
| 2017 | | 2016 | | | | 2017 | | 2016 |
Derivatives designated as cash flow hedges | | | | | | | | | |
Forward starting floating-to-fixed interest rate swaps | $ | (10 | ) | | $ | 1 |
| | Interest expense - net | | $ | — |
| | $ | — |
|
Interest rate locks | (9 | ) | | — |
| | Interest expense - net | | — |
| | — |
|
Currency exchange contracts | (6 | ) | | (3 | ) | | Cost of products sold | | (7 | ) | | (4 | ) |
Total | $ | (25 | ) | | $ | (2 | ) | | | | $ | (7 | ) | | $ | (4 | ) |
| | | | | | | | | |
| | | | | | | | | |
| Gain (loss) recognized in other comprehensive (loss) income | | Location of gain (loss) reclassified from Accumulated other comprehensive loss | | Gain (loss) reclassified from Accumulated other comprehensive loss |
| Nine months ended September 30 | | | | Nine months ended September 30 |
| 2017 | | 2016 | | | | 2017 | | 2016 |
Derivatives designated as cash flow hedges | | | | | | | | | |
Forward starting floating-to-fixed interest rate swaps | $ | (15 | ) | | $ | (18 | ) | | Interest expense - net | | $ | — |
| | $ | — |
|
Interest rate locks | (9 | ) | | — |
| | Interest expense - net | | — |
| | — |
|
Currency exchange contracts | (5 | ) | | (35 | ) | | Cost of products sold | | (12 | ) | | (3 | ) |
Total | $ | (29 | ) |
| $ | (53 | ) |
|
|
| $ | (12 | ) |
| $ | (3 | ) |
At September 30, 2019 and September 30, 2018, losses of $5 and $9, respectively, of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.
Amounts recognized in net income follow:Note 14. INVENTORY
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2017 |
| 2016 | | 2017 | | 2016 |
Derivatives designated as fair value hedges | | | | | | | |
Fixed-to-floating interest rate swaps | $ | (4 | ) | | $ | (28 | ) | | $ | (7 | ) | | $ | 78 |
|
Related long-term debt converted to floating interest rates by interest rate swaps | 4 |
| | 28 |
| | 7 |
| | (78 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Gains and losses described above were recognized in Interest expense - net.
Inventory accounted for using the first-in, first out (FIFO) method is carried at lower of cost or net realizable value. Inventory accounted for using the last-in, first-out (LIFO) method is carried at lower of cost or market. The components of inventory follow:
|
| | | | | | | |
| September 30, 2019 | | December 31, 2018 |
Raw materials | $ | 1,094 |
| | $ | 1,077 |
|
Work-in-process | 578 |
| | 500 |
|
Finished goods | 1,229 |
| | 1,208 |
|
Total inventory | $ | 2,901 |
| | $ | 2,785 |
|
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
Raw materials | $ | 959 |
| | $ | 880 |
|
Work-in-process | 434 |
| | 396 |
|
Finished goods | 1,167 |
| | 1,074 |
|
Inventory at FIFO | 2,560 |
| | 2,350 |
|
Excess of FIFO over LIFO cost | (103 | ) | | (96 | ) |
Total inventory | $ | 2,457 |
| | $ | 2,254 |
|
| |
Note 14.15. | BUSINESS SEGMENT INFORMATION |
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton’s operating segments are Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, Vehicle, and Vehicle.eMobility. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton’s business segments, see Note 1516 to the Consolidated Financial Statements contained in the 20162018 Form 10-K.
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2019 | | 2018 | | 2019 | | 2018 |
Net sales | | | | | | | |
Electrical Products | $ | 1,786 |
| | $ | 1,789 |
| | $ | 5,395 |
| | $ | 5,327 |
|
Electrical Systems and Services | 1,572 |
| | 1,519 |
| | 4,618 |
| | 4,413 |
|
Hydraulics | 603 |
| | 670 |
| | 1,987 |
| | 2,103 |
|
Aerospace | 513 |
| | 478 |
| | 1,532 |
| | 1,399 |
|
Vehicle | 761 |
| | 876 |
| | 2,374 |
| | 2,668 |
|
eMobility | 79 |
| | 80 |
| | 246 |
| | 240 |
|
Total net sales | $ | 5,314 |
| | $ | 5,412 |
| | $ | 16,152 |
| | $ | 16,150 |
|
| | | | | | | |
Segment operating profit | | | | | | | |
Electrical Products | $ | 358 |
| | $ | 343 |
| | $ | 1,050 |
| | $ | 984 |
|
Electrical Systems and Services | 284 |
| | 234 |
| | 751 |
| | 628 |
|
Hydraulics | 72 |
| | 94 |
| | 232 |
| | 285 |
|
Aerospace | 129 |
| | 105 |
| | 372 |
| | 284 |
|
Vehicle | 139 |
| | 166 |
| | 397 |
| | 464 |
|
eMobility | 4 |
| | 10 |
| | 16 |
| | 35 |
|
Total segment operating profit | 986 |
| | 952 |
| | 2,818 |
| | 2,680 |
|
| | | | | | | |
Corporate | | | | | | | |
Amortization of intangible assets | (93 | ) | | (95 | ) | | (280 | ) | | (289 | ) |
Interest expense - net | (54 | ) | | (67 | ) | | (183 | ) | | (205 | ) |
Pension and other postretirement benefits expense | (5 | ) | | (3 | ) | | (7 | ) | | (4 | ) |
Arbitration decision expense | — |
| | (275 | ) | | — |
| | (275 | ) |
Other corporate expense - net | (116 | ) | | (73 | ) | | (289 | ) | | (209 | ) |
Income before income taxes | 718 |
| | 439 |
| | 2,059 |
| | 1,698 |
|
Income tax expense | 116 |
| | 23 |
| | 299 |
| | 184 |
|
Net income | 602 |
| | 416 |
| | 1,760 |
| | 1,514 |
|
Less net income for noncontrolling interests | (1 | ) | | — |
| | (1 | ) | | — |
|
Net income attributable to Eaton ordinary shareholders | $ | 601 |
| | $ | 416 |
| | $ | 1,759 |
| | $ | 1,514 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended September 30 | | Nine months ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 |
Net sales | | | | | | | |
Electrical Products | $ | 1,857 |
| | $ | 1,767 |
| | $ | 5,371 |
| | $ | 5,231 |
|
Electrical Systems and Services | 1,421 |
| | 1,436 |
| | 4,168 |
| | 4,207 |
|
Hydraulics | 634 |
| | 562 |
| | 1,854 |
| | 1,702 |
|
Aerospace | 438 |
| | 436 |
| | 1,303 |
| | 1,328 |
|
Vehicle | 861 |
| | 786 |
| | 2,495 |
| | 2,412 |
|
Total net sales | $ | 5,211 |
| | $ | 4,987 |
| | $ | 15,191 |
| | $ | 14,880 |
|
| | | | | | | |
Segment operating profit | | | | | | | |
Electrical Products | $ | 346 |
| | $ | 331 |
| | $ | 957 |
| | $ | 924 |
|
Electrical Systems and Services | 196 |
| | 197 |
| | 545 |
| | 534 |
|
Hydraulics | 80 |
| | 61 |
| | 214 |
| | 161 |
|
Aerospace | 84 |
| | 88 |
| | 244 |
| | 251 |
|
Vehicle | 150 |
| | 122 |
| | 397 |
| | 377 |
|
Total segment operating profit | 856 |
| | 799 |
| | 2,357 |
| | 2,247 |
|
| | | | | | | |
Corporate | | | | | | | |
Amortization of intangible assets | (98 | ) | | (99 | ) | | (288 | ) | | (297 | ) |
Interest expense - net | (60 | ) | | (59 | ) | | (181 | ) | | (173 | ) |
Pension and other postretirement benefits expense | (16 | ) | | (18 | ) | | (38 | ) | | (45 | ) |
Gain on sale of business | 1,077 |
| | — |
| | 1,077 |
| | — |
|
Other corporate expense - net | (68 | ) | | (50 | ) | | (202 | ) | | (164 | ) |
Income before income taxes | 1,691 |
| | 573 |
| | 2,725 |
| | 1,568 |
|
Income tax expense | 292 |
| | 51 |
| | 378 |
| | 151 |
|
Net income | 1,399 |
| | 522 |
| | 2,347 |
| | 1,417 |
|
Less net (income) loss for noncontrolling interests | — |
| | 1 |
| | (1 | ) | | 1 |
|
Net income attributable to Eaton ordinary shareholders | $ | 1,399 |
| | $ | 523 |
| | $ | 2,346 |
| | $ | 1,418 |
|
| |
Note 15.16. | CONDENSED CONSOLIDATING FINANCIAL STATEMENTS |
On November 14, 2013 and September 15, 2017,The Registered Senior Notes issued by Eaton Corporation are registered senior notes under the Securities Act of 1933 (the Senior Notes).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 of Eaton's 2018 Form 10-K 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 20172019 and 2016,2018, the Company undertook certain steps to restructure ownership of various subsidiaries. The transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. This restructuring hasThese restructurings have been reflected as of the beginning of the earliest period presented below.
| | | | | | | | | | | | | | | | | | | | | | | | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2017 | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 | | CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2019 |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 1,695 |
| | $ | 1,669 |
| | $ | 3,223 |
| | $ | (1,376 | ) | | $ | 5,211 |
| $ | — |
| | $ | 1,744 |
| | $ | 1,826 |
| | $ | 2,996 |
| | $ | (1,252 | ) | | $ | 5,314 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Cost of products sold | — |
| | 1,322 |
| | 1,225 |
| | 2,294 |
| | (1,372 | ) | | 3,469 |
| — |
| | 1,339 |
| | 1,301 |
| | 2,127 |
| | (1,255 | ) | | 3,512 |
|
Selling and administrative expense | 32 |
| | 330 |
| | 200 |
| | 354 |
| | — |
| | 916 |
| 2 |
| | 368 |
| | 199 |
| | 316 |
| | — |
| | 885 |
|
Research and development expense | — |
| | 53 |
| | 54 |
| | 40 |
| | — |
| | 147 |
| — |
| | 37 |
| | 35 |
| | 75 |
| | — |
| | 147 |
|
Interest expense (income) - net | — |
| | 62 |
| | 5 |
| | (7 | ) | | — |
| | 60 |
| — |
| | 59 |
| | 5 |
| | (10 | ) | | — |
| | 54 |
|
Gain on Sale of Business | — |
| | 560 |
| | — |
| | 517 |
| | — |
| | 1,077 |
| |
Other expense (income) - net | 23 |
| | 1 |
| | (31 | ) | | 12 |
| | — |
| | 5 |
| 1 |
| | 3 |
| | 2 |
| | (8 | ) | | — |
| | (2 | ) |
Equity in loss (earnings) of subsidiaries, net of tax | (1,573 | ) | | (237 | ) | | (1,900 | ) | | (706 | ) | | 4,416 |
| | — |
| (611 | ) | | (217 | ) | | (797 | ) | | (677 | ) | | 2,302 |
| | — |
|
Intercompany expense (income) - net | 119 |
| | (33 | ) | | 335 |
| | (421 | ) | | — |
| | — |
| 7 |
| | (50 | ) | | 513 |
| | (470 | ) | | — |
| | — |
|
Income (loss) before income taxes | 1,399 |
| | 757 |
|
| 1,781 |
|
| 2,174 |
|
| (4,420 | ) |
| 1,691 |
| 601 |
| | 205 |
|
| 568 |
|
| 1,643 |
|
| (2,299 | ) |
| 718 |
|
Income tax expense (benefit) | — |
| | 120 |
| | 18 |
| | 154 |
| | — |
| | 292 |
| — |
| | 3 |
| | (27 | ) | | 139 |
| | 1 |
| | 116 |
|
Net income (loss) | 1,399 |
| | 637 |
|
| 1,763 |
|
| 2,020 |
|
| (4,420 | ) |
| 1,399 |
| 601 |
| | 202 |
|
| 595 |
|
| 1,504 |
|
| (2,300 | ) |
| 602 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | (1 | ) | | 1 |
| | — |
| — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Net income (loss) attributable to Eaton ordinary shareholders | $ | 1,399 |
| | $ | 637 |
|
| $ | 1,763 |
|
| $ | 2,019 |
|
| $ | (4,419 | ) |
| $ | 1,399 |
| $ | 601 |
| | $ | 202 |
|
| $ | 595 |
|
| $ | 1,503 |
|
| $ | (2,300 | ) |
| $ | 601 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | $ | 199 |
| | $ | (15 | ) | | $ | 200 |
| | $ | 267 |
| | $ | (452 | ) | | $ | 199 |
| $ | (259 | ) | | $ | (26 | ) | | $ | (268 | ) | | $ | (705 | ) | | $ | 999 |
| | $ | (259 | ) |
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 1,598 |
| | $ | 622 |
| | $ | 1,963 |
| | $ | 2,286 |
| | $ | (4,871 | ) | | $ | 1,598 |
| $ | 342 |
| | $ | 176 |
| | $ | 327 |
| | $ | 798 |
| | $ | (1,301 | ) | | $ | 342 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 1,660 |
| | $ | 1,592 |
| | $ | 3,032 |
| | $ | (1,297 | ) | | $ | 4,987 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 1,329 |
| | 1,168 |
| | 2,168 |
| | (1,294 | ) | | 3,371 |
|
Selling and administrative expense | 2 |
| | 332 |
| | 195 |
| | 324 |
| | — |
| | 853 |
|
Research and development expense | — |
| | 59 |
| | 44 |
| | 43 |
| | — |
| | 146 |
|
Interest expense (income) - net | — |
| | 59 |
| | 4 |
| | (3 | ) | | (1 | ) | | 59 |
|
Other expense (income) - net | (1 | ) | | 2 |
| | 6 |
| | (22 | ) | | — |
| | (15 | ) |
Equity in loss (earnings) of subsidiaries, net of tax | (628 | ) | | (173 | ) | | (914 | ) | | (228 | ) | | 1,943 |
| | — |
|
Intercompany expense (income) - net | 104 |
| | (34 | ) | | 333 |
| | (403 | ) | | — |
| | — |
|
Income (loss) before income taxes | 523 |
| | 86 |
|
| 756 |
|
| 1,153 |
|
| (1,945 | ) |
| 573 |
|
Income tax expense (benefit) | — |
| | (11 | ) | | 11 |
| | 52 |
| | (1 | ) | | 51 |
|
Net income (loss) | 523 |
| | 97 |
|
| 745 |
|
| 1,101 |
|
| (1,944 | ) |
| 522 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Net income (loss) attributable to Eaton ordinary shareholders | $ | 523 |
| | $ | 97 |
|
| $ | 745 |
|
| $ | 1,101 |
|
| $ | (1,943 | ) |
| $ | 523 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | $ | 24 |
| | $ | 24 |
| | $ | 29 |
| | $ | 3 |
| | $ | (56 | ) | | $ | 24 |
|
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 547 |
| | $ | 121 |
| | $ | 774 |
| | $ | 1,104 |
| | $ | (1,999 | ) | | $ | 547 |
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 | |
| | | | | | | | | | | | | | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 | | CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2018 |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 4,963 |
| | $ | 4,936 |
| | $ | 9,378 |
| | $ | (4,086 | ) | | $ | 15,191 |
| $ | — |
| | $ | 1,808 |
| | $ | 1,814 |
| | $ | 3,134 |
| | $ | (1,344 | ) | | $ | 5,412 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Cost of products sold | — |
| | 3,948 |
| | 3,638 |
| | 6,723 |
| | (4,080 | ) | | 10,229 |
| — |
| | 1,419 |
| | 1,320 |
| | 2,202 |
| | (1,344 | ) | | 3,597 |
|
Selling and administrative expense | 98 |
| | 998 |
| | 591 |
| | 1,016 |
| | — |
| | 2,703 |
| 3 |
| | 356 |
| | 197 |
| | 333 |
| | — |
| | 889 |
|
Research and development expense | — |
| | 164 |
| | 154 |
| | 122 |
| | — |
| | 440 |
| — |
| | 33 |
| | 37 |
| | 68 |
| | — |
| | 138 |
|
Interest expense (income) - net | — |
| | 180 |
| | 16 |
| | (15 | ) | | — |
| | 181 |
| — |
| | 68 |
| | 3 |
| | (4 | ) | | — |
| | 67 |
|
Gain on Sale of Business | — |
| | 560 |
| | — |
| | 517 |
| | — |
| | 1,077 |
| |
Arbitration decision expense | | — |
| | — |
| | 275 |
| | — |
| | — |
| | 275 |
|
Other expense (income) - net | 71 |
| | 8 |
| | (69 | ) | | (20 | ) | | — |
| | (10 | ) | (3 | ) | | 11 |
| | 4 |
| | (5 | ) | | — |
| | 7 |
|
Equity in loss (earnings) of subsidiaries, net of tax | (2,858 | ) | | (612 | ) | | (3,625 | ) | | (931 | ) | | 8,026 |
| | — |
| (430 | ) | | (191 | ) | | (892 | ) | | (433 | ) | | 1,946 |
| | — |
|
Intercompany expense (income) - net | 343 |
| | (106 | ) | | 1,007 |
| | (1,244 | ) | | — |
| | — |
| 14 |
| | 33 |
| | 579 |
| | (626 | ) | | — |
| | — |
|
Income (loss) before income taxes | 2,346 |
| | 943 |
| | 3,224 |
| | 4,244 |
| | (8,032 | ) | | 2,725 |
| 416 |
| | 79 |
|
| 291 |
|
| 1,599 |
|
| (1,946 | ) |
| 439 |
|
Income tax expense (benefit) | — |
| | 120 |
| | 37 |
| | 222 |
| | (1 | ) | | 378 |
| — |
| | (10 | ) | | (91 | ) | | 124 |
| | — |
| | 23 |
|
Net income (loss) | 2,346 |
| | 823 |
| | 3,187 |
| | 4,022 |
| | (8,031 | ) | | 2,347 |
| 416 |
| | 89 |
|
| 382 |
|
| 1,475 |
|
| (1,946 | ) |
| 416 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | (3 | ) | | 2 |
| | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to Eaton ordinary shareholders | $ | 2,346 |
| | $ | 823 |
| | $ | 3,187 |
| | $ | 4,019 |
| | $ | (8,029 | ) | | $ | 2,346 |
| $ | 416 |
| | $ | 89 |
|
| $ | 382 |
|
| $ | 1,475 |
|
| $ | (1,946 | ) |
| $ | 416 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | $ | 785 |
| | $ | 35 |
| | $ | 792 |
| | $ | 998 |
| | $ | (1,825 | ) | | $ | 785 |
| $ | (98 | ) | | $ | (22 | ) | | $ | (94 | ) | | $ | (240 | ) | | $ | 356 |
| | $ | (98 | ) |
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 3,131 |
| | $ | 858 |
| | $ | 3,979 |
| | $ | 5,017 |
| | $ | (9,854 | ) | | $ | 3,131 |
| $ | 318 |
| | $ | 67 |
| | $ | 288 |
| | $ | 1,235 |
| | $ | (1,590 | ) | | $ | 318 |
|
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 4,842 |
| | $ | 4,815 |
| | $ | 8,962 |
| | $ | (3,739 | ) | | $ | 14,880 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 3,788 |
| | 3,571 |
| | 6,462 |
| | (3,740 | ) | | 10,081 |
|
Selling and administrative expense | 6 |
| | 1,048 |
| | 589 |
| | 999 |
| | — |
| | 2,642 |
|
Research and development expense | — |
| | 176 |
| | 140 |
| | 128 |
| | — |
| | 444 |
|
Interest expense (income) - net | — |
| | 169 |
| | 13 |
| | (13 | ) | | 4 |
| | 173 |
|
Other expense (income) - net | (1 | ) | | 3 |
| | 10 |
| | (40 | ) | | — |
| | (28 | ) |
Equity in loss (earnings) of subsidiaries, net of tax | (1,726 | ) | | (495 | ) | | (2,398 | ) | | (457 | ) | | 5,076 |
| | — |
|
Intercompany expense (income) - net | 303 |
| | (104 | ) | | 901 |
| | (1,100 | ) | | — |
| | — |
|
Income (loss) before income taxes | 1,418 |
| | 257 |
| | 1,989 |
| | 2,983 |
| | (5,079 | ) | | 1,568 |
|
Income tax expense (benefit) | — |
| | 9 |
| | 24 |
| | 119 |
| | (1 | ) | | 151 |
|
Net income (loss) | 1,418 |
| | 248 |
| | 1,965 |
| | 2,864 |
| | (5,078 | ) | | 1,417 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | (2 | ) | | 3 |
| | 1 |
|
Net income (loss) attributable to Eaton ordinary shareholders | $ | 1,418 |
| | $ | 248 |
| | $ | 1,965 |
| | $ | 2,862 |
| | $ | (5,075 | ) | | $ | 1,418 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | $ | 42 |
| | $ | 68 |
| | $ | 59 |
| | $ | (7 | ) | | $ | (120 | ) | | $ | 42 |
|
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 1,460 |
| | $ | 316 |
| | $ | 2,024 |
| | $ | 2,855 |
| | $ | (5,195 | ) | | $ | 1,460 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS SEPTEMBER 30, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash | $ | 1 |
| | $ | 181 |
| | $ | 15 |
| | $ | 594 |
| | $ | — |
| | $ | 791 |
|
Short-term investments | — |
| | — |
| | — |
| | 843 |
| | — |
| | 843 |
|
Accounts receivable - net | — |
| | 386 |
| | 1,404 |
| | 2,172 |
| | — |
| | 3,962 |
|
Intercompany accounts receivable | 1 |
| | 1,136 |
| | 3,616 |
| | 3,802 |
| | (8,555 | ) | | — |
|
Inventory | — |
| | 330 |
| | 683 |
| | 1,529 |
| | (85 | ) | | 2,457 |
|
Prepaid expenses and other current assets | — |
| | 89 |
| | 45 |
| | 233 |
| | 29 |
| | 396 |
|
Total current assets | 2 |
| | 2,122 |
|
| 5,763 |
|
| 9,173 |
| | (8,611 | ) | | 8,449 |
|
| | | | | | | | | | | |
Property, plant and equipment - net | — |
| | 835 |
| | 687 |
| | 1,964 |
| | — |
| | 3,486 |
|
| | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | |
Goodwill | — |
| | 1,303 |
| | 6,293 |
| | 5,949 |
| | — |
| | 13,545 |
|
Other intangible assets | — |
| | 159 |
| | 3,305 |
| | 1,890 |
| | — |
| | 5,354 |
|
Deferred income taxes | — |
| | 692 |
| | — |
| | 270 |
| | (698 | ) | | 264 |
|
Investment in subsidiaries | 35,826 |
| | 14,062 |
| | 77,001 |
| | 13,661 |
| | (140,550 | ) | | — |
|
Intercompany loans receivable | — |
| | 7,459 |
| | 2,655 |
| | 58,045 |
| | (68,159 | ) | | — |
|
Other assets | — |
| | 794 |
| | 153 |
| | 680 |
| | — |
| | 1,627 |
|
Total assets | $ | 35,828 |
| | $ | 27,426 |
| | $ | 95,857 |
| | $ | 91,632 |
| | $ | (218,018 | ) | | $ | 32,725 |
|
| | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Short-term debt | $ | — |
| | $ | — |
| | $ | — |
| | $ | 5 |
| | $ | — |
| | $ | 5 |
|
Current portion of long-term debt | — |
| | 1,455 |
| | 36 |
| | 3 |
| | — |
| | 1,494 |
|
Accounts payable | — |
| | 382 |
| | 456 |
| | 1,201 |
| | — |
| | 2,039 |
|
Intercompany accounts payable | 262 |
| | 3,739 |
| | 3,614 |
| | 940 |
| | (8,555 | ) | | — |
|
Accrued compensation | — |
| | 111 |
| | 57 |
| | 266 |
| | — |
| | 434 |
|
Other current liabilities | 1 |
| | 636 |
| | 283 |
| | 1,009 |
| | (1 | ) | | 1,928 |
|
Total current liabilities | 263 |
| | 6,323 |
| | 4,446 |
| | 3,424 |
| | (8,556 | ) | | 5,900 |
|
| | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | |
Long-term debt | — |
| | 6,295 |
| | 969 |
| | 9 |
| | — |
| | 7,273 |
|
Pension liabilities | — |
| | 331 |
| | 76 |
| | 921 |
| | — |
| | 1,328 |
|
Other postretirement benefits liabilities | — |
| | 195 |
| | 98 |
| | 73 |
| | — |
| | 366 |
|
Deferred income taxes | — |
| | — |
| | 677 |
| | 348 |
| | (698 | ) | | 327 |
|
Intercompany loans payable | 18,972 |
| | 2,013 |
| | 45,719 |
| | 1,455 |
| | (68,159 | ) | | — |
|
Other noncurrent liabilities | — |
| | 287 |
| | 230 |
| | 378 |
| | — |
| | 895 |
|
Total noncurrent liabilities | 18,972 |
| | 9,121 |
|
| 47,769 |
|
| 3,184 |
|
| (68,857 | ) |
| 10,189 |
|
| | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | |
Eaton shareholders' equity | 16,593 |
| | 11,982 |
| | 43,642 |
| | 84,985 |
| | (140,609 | ) | | 16,593 |
|
Noncontrolling interests | — |
| | — |
| | — |
| | 39 |
| | 4 |
| | 43 |
|
Total equity | 16,593 |
| | 11,982 |
| | 43,642 |
| | 85,024 |
| | (140,605 | ) | | 16,636 |
|
Total liabilities and equity | $ | 35,828 |
| | $ | 27,426 |
|
| $ | 95,857 |
|
| $ | 91,632 |
|
| $ | (218,018 | ) |
| $ | 32,725 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 5,326 |
| | $ | 5,548 |
| | $ | 9,168 |
| | $ | (3,890 | ) | | $ | 16,152 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 4,150 |
| | 3,967 |
| | 6,552 |
| | (3,887 | ) | | 10,782 |
|
Selling and administrative expense | 8 |
| | 1,089 |
| | 609 |
| | 1,003 |
| | — |
| | 2,709 |
|
Research and development expense | — |
| | 113 |
| | 110 |
| | 231 |
| | — |
| | 454 |
|
Interest expense (income) - net | — |
| | 194 |
| | 14 |
| | (23 | ) | | (2 | ) | | 183 |
|
Other expense (income) - net | (12 | ) | | 1 |
| | (20 | ) | | (4 | ) | | — |
| | (35 | ) |
Equity in loss (earnings) of subsidiaries, net of tax | (1,785 | ) | | (699 | ) | | (2,359 | ) | | (2,072 | ) | | 6,915 |
| | — |
|
Intercompany expense (income) - net | 30 |
| | (48 | ) | | 1,386 |
| | (1,368 | ) | | — |
| | — |
|
Income (loss) before income taxes | 1,759 |
| | 526 |
| | 1,841 |
| | 4,849 |
| | (6,916 | ) | | 2,059 |
|
Income tax expense (benefit) | — |
| | 18 |
| | (62 | ) | | 343 |
| | — |
| | 299 |
|
Net income (loss) | 1,759 |
| | 508 |
| | 1,903 |
| | 4,506 |
| | (6,916 | ) | | 1,760 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | (1 | ) | | — |
| | (1 | ) |
Net income (loss) attributable to Eaton ordinary shareholders | $ | 1,759 |
| | $ | 508 |
| | $ | 1,903 |
| | $ | 4,505 |
| | $ | (6,916 | ) | | $ | 1,759 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | $ | (222 | ) | | $ | (22 | ) | | $ | (215 | ) | | $ | (612 | ) | | $ | 849 |
| | $ | (222 | ) |
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 1,537 |
| | $ | 486 |
| | $ | 1,688 |
| | $ | 3,893 |
| | $ | (6,067 | ) | | $ | 1,537 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net sales | $ | — |
| | $ | 5,306 |
| | $ | 5,304 |
| | $ | 9,567 |
| | $ | (4,027 | ) | | $ | 16,150 |
|
| | | | | | | | | | | |
Cost of products sold | — |
| | 4,198 |
| | 3,845 |
| | 6,824 |
| | (4,026 | ) | | 10,841 |
|
Selling and administrative expense | 8 |
| | 1,093 |
| | 575 |
| | 1,003 |
| | — |
| | 2,679 |
|
Research and development expense | — |
| | 109 |
| | 113 |
| | 217 |
| | — |
| | 439 |
|
Interest expense (income) - net | — |
| | 203 |
| | 11 |
| | (11 | ) | | 2 |
| | 205 |
|
Arbitration decision expense | — |
| | — |
| | 275 |
| | — |
| | — |
| | 275 |
|
Other expense (income) - net | (22 | ) | | 25 |
| | 31 |
| | (21 | ) | | — |
| | 13 |
|
Equity in loss (earnings) of subsidiaries, net of tax | (1,531 | ) | | (628 | ) | | (2,588 | ) | | (1,716 | ) | | 6,463 |
| | — |
|
Intercompany expense (income) - net | 31 |
| | 35 |
| | 1,623 |
| | (1,689 | ) | | — |
| | — |
|
Income (loss) before income taxes | 1,514 |
| | 271 |
| | 1,419 |
| | 4,960 |
| | (6,466 | ) | | 1,698 |
|
Income tax expense (benefit) | — |
| | (23 | ) | | (119 | ) | | 327 |
| | (1 | ) | | 184 |
|
Net income (loss) | 1,514 |
| | 294 |
| | 1,538 |
| | 4,633 |
| | (6,465 | ) | | 1,514 |
|
Less net loss (income) for noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income (loss) attributable to Eaton ordinary shareholders | $ | 1,514 |
| | $ | 294 |
| | $ | 1,538 |
| | $ | 4,633 |
| | $ | (6,465 | ) | | $ | 1,514 |
|
| | | | | | | | | | | |
Other comprehensive income (loss) | $ | (426 | ) | | $ | (37 | ) | | $ | (394 | ) | | $ | (1,012 | ) | | $ | 1,443 |
| | $ | (426 | ) |
Total comprehensive income (loss) attributable to Eaton ordinary shareholders | $ | 1,088 |
| | $ | 257 |
| | $ | 1,144 |
| | $ | 3,621 |
| | $ | (5,022 | ) | | $ | 1,088 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2016 | |
CONDENSED CONSOLIDATING BALANCE SHEETS SEPTEMBER 30, 2019 | | CONDENSED CONSOLIDATING BALANCE SHEETS SEPTEMBER 30, 2019 |
| | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Assets | | | | | | | | | | | | | | | | | | | | | | |
Current assets | | | | | | | | | | | | | | | | | | | | | | |
Cash | $ | 1 |
| | $ | 92 |
| | $ | 4 |
| | $ | 446 |
| | $ | — |
| | $ | 543 |
| $ | — |
| | $ | 222 |
| | $ | — |
| | $ | 327 |
| | $ | — |
| | $ | 549 |
|
Short-term investments | — |
| | — |
| | — |
| | 203 |
| | — |
| | 203 |
| — |
| | — |
| | — |
| | 281 |
| | — |
| | 281 |
|
Accounts receivable - net | — |
| | 536 |
| | 1,049 |
| | 1,975 |
| | — |
| | 3,560 |
| — |
| | 475 |
| | 1,289 |
| | 2,023 |
| | — |
| | 3,787 |
|
Intercompany accounts receivable | 5 |
| | 954 |
| | 4,023 |
| | 3,633 |
| | (8,615 | ) | | — |
| 9 |
| | 855 |
| | 1,957 |
| | 2,681 |
| | (5,502 | ) | | — |
|
Inventory | — |
| | 342 |
| | 642 |
| | 1,349 |
| | (79 | ) | | 2,254 |
| — |
| | 577 |
| | 857 |
| | 1,546 |
| | (79 | ) | | 2,901 |
|
Prepaid expenses and other current assets | — |
| | 77 |
| | 42 |
| | 237 |
| | 25 |
| | 381 |
| — |
| | 100 |
| | 32 |
| | 347 |
| | 15 |
| | 494 |
|
Total current assets | 6 |
| | 2,001 |
| | 5,760 |
| | 7,843 |
| | (8,669 | ) | | 6,941 |
| 9 |
| | 2,229 |
|
| 4,135 |
|
| 7,205 |
| | (5,566 | ) | | 8,012 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Property, plant and equipment - net | — |
| | 857 |
| | 706 |
| | 1,880 |
| | — |
| | 3,443 |
| — |
| | 851 |
| | 669 |
| | 1,963 |
| | — |
| | 3,483 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | | | | | | | | | | | | |
Goodwill | — |
| | 1,355 |
| | 6,293 |
| | 5,553 |
| | — |
| | 13,201 |
| — |
| | 1,330 |
| | 6,705 |
| | 5,302 |
| | — |
| | 13,337 |
|
Other intangible assets | — |
| | 169 |
| | 3,442 |
| | 1,903 |
| | — |
| | 5,514 |
| — |
| | 123 |
| | 2,941 |
| | 1,593 |
| | — |
| | 4,657 |
|
Operating lease assets | | — |
| | 159 |
| | 62 |
| | 223 |
| | — |
| | 444 |
|
Deferred income taxes | — |
| | 904 |
| | — |
| | 228 |
| | (772 | ) | | 360 |
| — |
| | 351 |
| | — |
| | 278 |
| | (335 | ) | | 294 |
|
Investment in subsidiaries | 32,795 |
| | 13,743 |
| | 72,938 |
| | 12,577 |
| | (132,053 | ) | | — |
| 16,939 |
| | 26,627 |
| | 73,052 |
| | 27,306 |
| | (143,924 | ) | | — |
|
Intercompany loans receivable | — |
| | 7,605 |
| | 2,061 |
| | 56,598 |
| | (66,264 | ) | | — |
| 9 |
| | 5,736 |
| | 7,334 |
| | 60,233 |
| | (73,312 | ) | | — |
|
Other assets | — |
| | 491 |
| | 134 |
| | 335 |
| | — |
| | 960 |
| — |
| | 778 |
| | 159 |
| | 731 |
| | — |
| | 1,668 |
|
Total assets | $ | 32,801 |
| | $ | 27,125 |
| | $ | 91,334 |
| | $ | 86,917 |
| | $ | (207,758 | ) | | $ | 30,419 |
| $ | 16,957 |
| | $ | 38,184 |
| | $ | 95,057 |
| | $ | 104,834 |
| | $ | (223,137 | ) | | $ | 31,895 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | | | | | | | | | | | | |
Short-term debt | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | 6 |
| | $ | — |
| | $ | 14 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | — |
| | $ | 2 |
|
Current portion of long-term debt | — |
| | 1,250 |
| | 296 |
| | 6 |
| | — |
| | 1,552 |
| — |
| | 4 |
| | — |
| | 2 |
| | — |
| | 6 |
|
Accounts payable | 1 |
| | 372 |
| | 252 |
| | 1,093 |
| | — |
| | 1,718 |
| — |
| | 494 |
| | 508 |
| | 1,288 |
| | — |
| | 2,290 |
|
Intercompany accounts payable | 281 |
| | 3,870 |
| | 3,115 |
| | 1,349 |
| | (8,615 | ) | | — |
| 9 |
| | 1,355 |
| | 2,981 |
| | 1,157 |
| | (5,502 | ) | | — |
|
Accrued compensation | — |
| | 98 |
| | 58 |
| | 223 |
| | — |
| | 379 |
| — |
| | 99 |
| | 59 |
| | 263 |
| | — |
| | 421 |
|
Other current liabilities | 1 |
| | 591 |
| | 291 |
| | 941 |
| | (2 | ) | | 1,822 |
| 1 |
| | 588 |
| | 269 |
| | 1,086 |
| | (2 | ) | | 1,942 |
|
Total current liabilities | 283 |
| | 6,181 |
| | 4,020 |
| | 3,618 |
| | (8,617 | ) | | 5,485 |
| 10 |
| | 2,540 |
| | 3,817 |
| | 3,798 |
| | (5,504 | ) | | 4,661 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | — |
| | 5,767 |
| | 936 |
| | 8 |
| | — |
| | 6,711 |
| — |
| | 5,900 |
| | 2,107 |
| | 6 |
| | — |
| | 8,013 |
|
Pension liabilities | — |
| | 610 |
| | 161 |
| | 888 |
| | — |
| | 1,659 |
| — |
| | 378 |
| | 127 |
| | 734 |
| | — |
| | 1,239 |
|
Other postretirement benefits liabilities | — |
| | 198 |
| | 99 |
| | 71 |
| | — |
| | 368 |
| — |
| | 167 |
| | 82 |
| | 73 |
| | — |
| | 322 |
|
Operating lease liabilities | | — |
| | 116 |
| | 47 |
| | 170 |
| | — |
| | 333 |
|
Deferred income taxes | — |
| | — |
| | 732 |
| | 361 |
| | (772 | ) | | 321 |
| — |
| | — |
| | 458 |
| | 186 |
| | (335 | ) | | 309 |
|
Intercompany loans payable | 17,621 |
| | 2,603 |
| | 44,788 |
| | 1,252 |
| | (66,264 | ) | | — |
| 1,099 |
| | 5,272 |
| | 65,822 |
| | 1,119 |
| | (73,312 | ) | | — |
|
Other noncurrent liabilities | — |
| | 327 |
| | 211 |
| | 396 |
| | — |
| | 934 |
| — |
| | 454 |
| | 304 |
| | 360 |
| | — |
| | 1,118 |
|
Total noncurrent liabilities | 17,621 |
| | 9,505 |
|
| 46,927 |
|
| 2,976 |
|
| (67,036 | ) |
| 9,993 |
| 1,099 |
| | 12,287 |
|
| 68,947 |
|
| 2,648 |
|
| (73,647 | ) |
| 11,334 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | | | | | | | | | | | | |
Eaton shareholders' equity | 14,897 |
| | 11,439 |
| | 40,387 |
| | 80,285 |
| | (132,111 | ) | | 14,897 |
| 15,848 |
| | 23,357 |
| | 22,293 |
| | 98,336 |
| | (143,986 | ) | | 15,848 |
|
Noncontrolling interests | — |
| | — |
| | — |
| | 38 |
| | 6 |
| | 44 |
| — |
| | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
Total equity | 14,897 |
| | 11,439 |
| | 40,387 |
| | 80,323 |
| | (132,105 | ) | | 14,941 |
| 15,848 |
| | 23,357 |
| | 22,293 |
| | 98,388 |
| | (143,986 | ) | | 15,900 |
|
Total liabilities and equity | $ | 32,801 |
| | $ | 27,125 |
|
| $ | 91,334 |
|
| $ | 86,917 |
|
| $ | (207,758 | ) |
| $ | 30,419 |
| $ | 16,957 |
| | $ | 38,184 |
|
| $ | 95,057 |
|
| $ | 104,834 |
|
| $ | (223,137 | ) |
| $ | 31,895 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net cash provided by (used in) operating activities | $ | 528 |
| | $ | (296 | ) | | $ | 802 |
| | $ | 2,365 |
| | $ | (1,612 | ) | | $ | 1,787 |
|
| | | | | | | | | | | |
Investing activities | | | | | | | | | | | |
Capital expenditures for property, plant and equipment | — |
| | (63 | ) | | (75 | ) | | (213 | ) | | — |
| | (351 | ) |
Cash received from sales (paid for acquisitions) of affiliates | — |
| | — |
| | (92 | ) | | 92 |
| | — |
| | — |
|
Purchases of short-term investments - net | — |
| | — |
| | — |
| | (621 | ) | | — |
| | (621 | ) |
Investments in affiliates | (90 | ) | | (108 | ) | | — |
| | (90 | ) | | 288 |
| | — |
|
Return of investments in affiliates | — |
| | — |
| | 20 |
| | — |
| | (20 | ) | | — |
|
Loans to affiliates | — |
| | (29 | ) | | — |
| | (4,754 | ) | | 4,783 |
| | — |
|
Repayments of loans from affiliates | — |
| | 303 |
| | 46 |
| | 3,816 |
| | (4,165 | ) | | — |
|
Proceeds from sale of business | — |
| | 330 |
| | — |
| | 270 |
| | — |
| | 600 |
|
Other - net | — |
| | (36 | ) | | 2 |
| | (29 | ) | | — |
| | (63 | ) |
Net cash provided by (used in) investing activities | (90 | ) | | 397 |
|
| (99 | ) |
| (1,529 | ) |
| 886 |
|
| (435 | ) |
| | | | | | | | | | | |
Financing activities | | | | | | | | | | | |
Proceeds from borrowings | — |
| | 1,000 |
| | — |
| | — |
| | — |
| | 1,000 |
|
Payments on borrowings | — |
| | (250 | ) | | (297 | ) | | (6 | ) | | — |
| | (553 | ) |
Proceeds from borrowings from affiliates | 1,917 |
| | 1,873 |
| | 965 |
| | 28 |
| | (4,783 | ) | | — |
|
Payments on borrowings from affiliates | (822 | ) | | (2,904 | ) | | (352 | ) | | (87 | ) | | 4,165 |
| | — |
|
Capital contributions from affiliates | — |
| | — |
| | 90 |
| | 198 |
| | (288 | ) | | — |
|
Return of capital to affiliates | — |
| | — |
| | — |
| | (20 | ) | | 20 |
| | — |
|
Other intercompany financing activities | — |
| | 287 |
| | (290 | ) | | 3 |
| | — |
| | — |
|
Cash dividends paid | (803 | ) | | — |
| | — |
| | — |
| | — |
| | (803 | ) |
Cash dividends paid to affiliates | — |
| | — |
| | (803 | ) | | (809 | ) | | 1,612 |
| | — |
|
Exercise of employee stock options | 59 |
| | — |
| | — |
| | — |
| | — |
| | 59 |
|
Repurchase of shares | (789 | ) | | — |
| | — |
| | — |
| | — |
| | (789 | ) |
Employee taxes paid from shares withheld | — |
| | (14 | ) | | (4 | ) | | (3 | ) | | — |
| | (21 | ) |
Other - net | — |
| | (4 | ) | | (1 | ) | | (3 | ) | | — |
| | (8 | ) |
Net cash provided by (used in) financing activities | (438 | ) | | (12 | ) |
| (692 | ) |
| (699 | ) |
| 726 |
|
| (1,115 | ) |
| | | | | | | | | | | |
Effect of currency on cash | — |
| | — |
| | — |
| | 11 |
| | — |
| | 11 |
|
Total increase (decrease) in cash | — |
| | 89 |
|
| 11 |
|
| 148 |
|
| — |
|
| 248 |
|
Cash at the beginning of the period | 1 |
| | 92 |
| | 4 |
| | 446 |
| | — |
| | 543 |
|
Cash at the end of the period | $ | 1 |
| | $ | 181 |
|
| $ | 15 |
|
| $ | 594 |
|
| $ | — |
|
| $ | 791 |
|
CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Assets | | | | | | | | | | | |
Current assets | | | | | | | | | | | |
Cash | $ | 1 |
| | $ | 21 |
| | $ | — |
| | $ | 261 |
| | $ | — |
| | $ | 283 |
|
Short-term investments | — |
| | — |
| | — |
| | 157 |
| | — |
| | 157 |
|
Accounts receivable - net | — |
| | 483 |
| | 1,400 |
| | 1,975 |
| | — |
| | 3,858 |
|
Intercompany accounts receivable | — |
| | 1,575 |
| | 1,851 |
| | 2,968 |
| | (6,394 | ) | | — |
|
Inventory | — |
| | 540 |
| | 766 |
| | 1,555 |
| | (76 | ) | | 2,785 |
|
Prepaid expenses and other current assets | — |
| | 107 |
| | 32 |
| | 354 |
| | 14 |
| | 507 |
|
Total current assets | 1 |
| | 2,726 |
| | 4,049 |
| | 7,270 |
| | (6,456 | ) | | 7,590 |
|
| | | | | | | | | | | |
Property, plant and equipment - net | — |
| | 843 |
| | 678 |
| | 1,946 |
| | — |
| | 3,467 |
|
| | | | | | | | | | | |
Other noncurrent assets | | | | | | | | | | | |
Goodwill | — |
| | 1,330 |
| | 6,705 |
| | 5,293 |
| | — |
| | 13,328 |
|
Other intangible assets | — |
| | 128 |
| | 3,054 |
| | 1,664 |
| | — |
| | 4,846 |
|
Deferred income taxes | — |
| | 340 |
| | — |
| | 288 |
| | (335 | ) | | 293 |
|
Investment in subsidiaries | 16,476 |
| | 25,956 |
| | 71,334 |
| | 25,557 |
| | (139,323 | ) | | — |
|
Intercompany loans receivable | 1,508 |
| | 5,912 |
| | 8,406 |
| | 59,078 |
| | (74,904 | ) | | — |
|
Other assets | — |
| | 746 |
| | 117 |
| | 705 |
| | — |
| | 1,568 |
|
Total assets | $ | 17,985 |
| | $ | 37,981 |
| | $ | 94,343 |
| | $ | 101,801 |
| | $ | (221,018 | ) | | $ | 31,092 |
|
| | | | | | | | | | | |
Liabilities and shareholders’ equity | | | | | | | | | | | |
Current liabilities | | | | | | | | | | | |
Short-term debt | $ | — |
| | $ | 388 |
| | $ | — |
| | $ | 26 |
| | $ | — |
| | $ | 414 |
|
Current portion of long-term debt | — |
| | 338 |
| | — |
| | 1 |
| | — |
| | 339 |
|
Accounts payable | — |
| | 476 |
| | 416 |
| | 1,238 |
| | — |
| | 2,130 |
|
Intercompany accounts payable | 32 |
| | 1,127 |
| | 3,206 |
| | 2,029 |
| | (6,394 | ) | | — |
|
Accrued compensation | — |
| | 135 |
| | 71 |
| | 251 |
| | — |
| | 457 |
|
Other current liabilities | 30 |
| | 525 |
| | 259 |
| | 1,002 |
| | (2 | ) | | 1,814 |
|
Total current liabilities | 62 |
| | 2,989 |
| | 3,952 |
| | 4,547 |
| | (6,396 | ) | | 5,154 |
|
| | | | | | | | | | | |
Noncurrent liabilities | | | | | | | | | | | |
Long-term debt | — |
| | 5,814 |
| | 945 |
| | 7 |
| | 2 |
| | 6,768 |
|
Pension liabilities | — |
| | 383 |
| | 130 |
| | 791 |
| | — |
| | 1,304 |
|
Other postretirement benefits liabilities | — |
| | 166 |
| | 83 |
| | 72 |
| | — |
| | 321 |
|
Deferred income taxes | — |
| | 1 |
| | 508 |
| | 175 |
| | (335 | ) | | 349 |
|
Intercompany loans payable | 1,816 |
| | 5,182 |
| | 66,507 |
| | 1,399 |
| | (74,904 | ) | | — |
|
Other noncurrent liabilities | — |
| | 389 |
| | 291 |
| | 374 |
| | — |
| | 1,054 |
|
Total noncurrent liabilities | 1,816 |
| | 11,935 |
|
| 68,464 |
|
| 2,818 |
|
| (75,237 | ) |
| 9,796 |
|
| | | | | | | | | | | |
Shareholders’ equity | | | | | | | | | | | |
Eaton shareholders' equity | 16,107 |
| | 23,057 |
| | 21,927 |
| | 94,401 |
| | (139,385 | ) | | 16,107 |
|
Noncontrolling interests | — |
| | — |
| | — |
| | 35 |
| | — |
| | 35 |
|
Total equity | 16,107 |
| | 23,057 |
| | 21,927 |
| | 94,436 |
| | (139,385 | ) | | 16,142 |
|
Total liabilities and equity | $ | 17,985 |
| | $ | 37,981 |
|
| $ | 94,343 |
|
| $ | 101,801 |
|
| $ | (221,018 | ) |
| $ | 31,092 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 | |
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 | | CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 |
| | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total | Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net cash provided by (used in) operating activities | $ | (158 | ) | | $ | (17 | ) | | $ | (285 | ) | | $ | 2,392 |
| | $ | — |
| | $ | 1,932 |
| $ | (67 | ) | | $ | 980 |
| | $ | 415 |
| | $ | 1,186 |
| | $ | — |
| | $ | 2,514 |
|
| | | | | | | | | | | | | | | | | | | | | | |
Investing activities | | | | | | | | | | | | | | | | | | | | | | |
Capital expenditures for property, plant and equipment | — |
| | (62 | ) | | (75 | ) | | (209 | ) | | — |
| | (346 | ) | — |
| | (74 | ) | | (88 | ) | | (279 | ) | | — |
| | (441 | ) |
Cash received from acquisitions of businesses, net of cash acquired | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
| |
Cash paid for acquisitions of businesses, net of cash acquired | | — |
| | — |
| | (30 | ) | | (247 | ) | | — |
| | (277 | ) |
Sales (purchases) of short-term investments - net | — |
| | — |
| | 2 |
| | (31 | ) | | — |
| | (29 | ) | — |
| | — |
| | — |
| | (132 | ) | | — |
| | (132 | ) |
Investments in affiliates | (1,250 | ) | | — |
| | (120 | ) | | (1,370 | ) | | 2,740 |
| | — |
| |
Return of investments in affiliates | — |
| | — |
| | 47 |
| | — |
| | (47 | ) | | — |
| |
Loans to affiliates | — |
| | (287 | ) | | (655 | ) | | (6,457 | ) | | 7,399 |
| | — |
| — |
| | (470 | ) | | (280 | ) | | (5,044 | ) | | 5,794 |
| | — |
|
Repayments of loans from affiliates | — |
| | 1,288 |
| | — |
| | 4,501 |
| | (5,789 | ) | | — |
| — |
| | 663 |
| | — |
| | 3,156 |
| | (3,819 | ) | | — |
|
Proceeds (payments) for settlement of currency exchange contracts not designated as hedges - net | | — |
| | — |
| | — |
| | 26 |
| | — |
| | 26 |
|
Other - net | — |
| | — |
| | 30 |
| | (27 | ) | | — |
| | 3 |
| — |
| | (21 | ) | | 32 |
| | (19 | ) | | — |
| | (8 | ) |
Net cash provided by (used in) investing activities | (1,250 | ) | | 939 |
|
| (770 | ) |
| (3,593 | ) |
| 4,303 |
|
| (371 | ) | — |
| | 98 |
|
| (366 | ) |
| (2,539 | ) |
| 1,975 |
|
| (832 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Financing activities | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from borrowings | — |
| | 22 |
| | 611 |
| | — |
| | — |
| | 633 |
| — |
| | — |
| | 1,232 |
| | — |
| | — |
| | 1,232 |
|
Payments on borrowings | — |
| | (408 | ) | | (240 | ) | | (18 | ) | | — |
| | (666 | ) | — |
| | (726 | ) | | — |
| | (31 | ) | | — |
| | (757 | ) |
Proceeds from borrowings from affiliates | 3,333 |
| | 2,815 |
| | 1,059 |
| | 192 |
| | (7,399 | ) | | — |
| 1,927 |
| | 2,689 |
| | 428 |
| | 750 |
| | (5,794 | ) | | — |
|
Payments on borrowings from affiliates | (637 | ) | | (3,453 | ) | | (1,658 | ) | | (41 | ) | | 5,789 |
| | — |
| (16 | ) | | (2,781 | ) | | (458 | ) | | (564 | ) | | 3,819 |
| | — |
|
Capital contributions from affiliates | — |
| | — |
| | 1,370 |
| | 1,370 |
| | (2,740 | ) | | — |
| |
Return of capital to affiliates | — |
| | — |
| | — |
| | (47 | ) | | 47 |
| | — |
| |
Other intercompany financing activities | — |
| | 158 |
| | (81 | ) | | (77 | ) | | — |
| | — |
| — |
| | (23 | ) | | (1,239 | ) | | 1,262 |
| | — |
| | — |
|
Cash dividends paid | (780 | ) | | — |
| | — |
| | — |
| | — |
| | (780 | ) | (907 | ) | | — |
| | — |
| | — |
| | — |
| | (907 | ) |
Exercise of employee stock options | 60 |
| | — |
| | — |
| | — |
| | — |
| | 60 |
| 40 |
| | — |
| | — |
| | — |
| | — |
| | 40 |
|
Repurchase of shares | (567 | ) | | — |
| | — |
| | — |
| | — |
| | (567 | ) | (978 | ) | | — |
| | — |
| | — |
| | — |
| | (978 | ) |
Employee taxes paid from shares withheld | — |
| | (12 | ) | | (4 | ) | | (2 | ) | | — |
| | (18 | ) | — |
| | (36 | ) | | (6 | ) | | (3 | ) | | — |
| | (45 | ) |
Other - net | — |
| | — |
| | (3 | ) | | (2 | ) | | — |
| | (5 | ) | — |
| | — |
| | (6 | ) | | (2 | ) | | — |
| | (8 | ) |
Net cash provided by (used in) financing activities | 1,409 |
| | (878 | ) |
| 1,054 |
|
| 1,375 |
|
| (4,303 | ) |
| (1,343 | ) | 66 |
| | (877 | ) |
| (49 | ) |
| 1,412 |
|
| (1,975 | ) |
| (1,423 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Effect of currency on cash | — |
| | — |
| | — |
| | 8 |
| | — |
| | 8 |
| — |
| | — |
| | — |
| | 7 |
| | — |
| | 7 |
|
Total increase (decrease) in cash | 1 |
| | 44 |
|
| (1 | ) |
| 182 |
|
| — |
|
| 226 |
| (1 | ) | | 201 |
|
| — |
|
| 66 |
|
| — |
|
| 266 |
|
Cash at the beginning of the period | — |
| | 26 |
| | 7 |
| | 235 |
| | — |
| | 268 |
| 1 |
| | 21 |
| | — |
| | 261 |
| | — |
| | 283 |
|
Cash at the end of the period | $ | 1 |
| | $ | 70 |
|
| $ | 6 |
|
| $ | 417 |
|
| $ | — |
|
| $ | 494 |
| $ | — |
| | $ | 222 |
|
| $ | — |
|
| $ | 327 |
|
| $ | — |
|
| $ | 549 |
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018 |
| | | | | | | | | | | | | | | | | | | | | | | |
| Eaton Corporation plc | | Eaton Corporation | | Guarantors | | Other subsidiaries | | Consolidating adjustments | | Total |
Net cash provided by (used in) operating activities | $ | (11 | ) | | $ | (174 | ) | | $ | 393 |
| | $ | 1,718 |
| | $ | (88 | ) | | $ | 1,838 |
|
| | | | | | | | | | | |
Investing activities | | | | | | | | | | | |
Capital expenditures for property, plant and equipment | — |
| | (75 | ) | | (74 | ) | | (262 | ) | | — |
| | (411 | ) |
Sales (purchases) of short-term investments - net | — |
| | — |
| | — |
| | 329 |
| | — |
| | 329 |
|
Investments in affiliates | — |
| | (36 | ) | | — |
| | — |
| | 36 |
| | — |
|
Loans to affiliates | — |
| | (100 | ) | | (84 | ) | | (4,764 | ) | | 4,948 |
| | — |
|
Repayments of loans from affiliates | — |
| | 647 |
| | 956 |
| | 3,893 |
| | (5,496 | ) | | — |
|
Proceeds (payments) for settlement of currency exchange contracts not designated as hedges - net | — |
| | 11 |
| | — |
| | (133 | ) | | — |
| | (122 | ) |
Other - net | — |
| | (26 | ) | | 3 |
| | (29 | ) | | — |
| | (52 | ) |
Net cash provided by (used in) investing activities | — |
| | 421 |
|
| 801 |
|
| (966 | ) |
| (512 | ) |
| (256 | ) |
| | | | | | | | | | | |
Financing activities | | | | | | | | | | | |
Proceeds from borrowings | 4 |
| | 65 |
| | — |
| | 11 |
| | — |
| | 80 |
|
Payments on borrowings | — |
| | (450 | ) | | (35 | ) | | (1 | ) | | — |
| | (486 | ) |
Proceeds from borrowings from affiliates | 2,671 |
| | 1,995 |
| | 183 |
| | 99 |
| | (4,948 | ) | | — |
|
Payments on borrowings from affiliates | (1,227 | ) | | (2,775 | ) | | (654 | ) | | (840 | ) | | 5,496 |
| | — |
|
Capital contributions from affiliates | — |
| | — |
| | — |
| | 36 |
| | (36 | ) | | — |
|
Other intercompany financing activities | — |
| | 788 |
| | (687 | ) | | (101 | ) | | — |
| | — |
|
Cash dividends paid | (864 | ) | | — |
| | — |
| | — |
| | — |
| | (864 | ) |
Cash dividends paid to affiliates | — |
| | — |
| | — |
| | (88 | ) | | 88 |
| | — |
|
Exercise of employee stock options | 28 |
| | — |
| | — |
| | — |
| | — |
| | 28 |
|
Repurchase of shares | (600 | ) | | — |
| | — |
| | — |
| | — |
| | (600 | ) |
Employee taxes paid from shares withheld | — |
| | (16 | ) | | (5 | ) | | (3 | ) | | — |
| | (24 | ) |
Other - net | — |
| | (1 | ) | | — |
| | (1 | ) | | — |
| | (2 | ) |
Net cash provided by (used in) financing activities | 12 |
| | (394 | ) |
| (1,198 | ) |
| (888 | ) |
| 600 |
|
| (1,868 | ) |
| | | | | | | | | | | |
Effect of currency on cash | — |
| | — |
| | — |
| | 52 |
| | — |
| | 52 |
|
Total increase (decrease) in cash | 1 |
| | (147 | ) |
| (4 | ) |
| (84 | ) |
| — |
|
| (234 | ) |
Cash at the beginning of the period | — |
| | 183 |
| | 18 |
| | 360 |
| | — |
| | 561 |
|
Cash at the end of the period | $ | 1 |
| | $ | 36 |
|
| $ | 14 |
|
| $ | 276 |
|
| $ | — |
|
| $ | 327 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is a power management company with 20162018 net sales of $19.7$21.6 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic, and mechanical power more efficiently,reliably, safely, and sustainably. Eaton has approximately 96,000100,000 employees in over 6059 countries and sells products to customers in more than 175 countries.
Summary of Results of Operations
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:
| | | Three months ended September 30 | | Nine months ended September 30 | Three months ended September 30 | | Nine months ended September 30 |
| 2017 | | 2016 | | 2017 | | 2016 | 2019 | | 2018 | | 2019 | | 2018 |
Net sales | $ | 5,211 |
| | $ | 4,987 |
| | $ | 15,191 |
| | $ | 14,880 |
| $ | 5,314 |
| | $ | 5,412 |
| | $ | 16,152 |
| | $ | 16,150 |
|
Net income attributable to Eaton ordinary shareholders | 1,399 |
| | 523 |
| | 2,346 |
| | 1,418 |
| 601 |
| | 416 |
| | 1,759 |
| | 1,514 |
|
Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 3.14 |
| | $ | 1.15 |
| | $ | 5.23 |
| | $ | 3.09 |
| $ | 1.44 |
| | $ | 0.95 |
| | $ | 4.16 |
| | $ | 3.45 |
|
On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, 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 markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 through July 2019 to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Systems and Services business segment.
On July 31, 2017,19, 2019, Eaton soldacquired Innovative Switchgear Solutions, Inc. (ISG), a 50% interestspecialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. Its 2018 sales were approximately $18. ISG will be reported within the Electrical Systems and Services business segment.
On July 22, 2019, Eaton committed to acquire the Souriau-Sunbank Connection Technologies (Souriau-Sunbank) business of TransDigm Group Inc. for $920. Headquartered in its heavy-duty and medium-duty commercial vehicle automated transmission businessVersailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions 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% investmentharsh environments in the joint venture being remeasuredaerospace, defense, industrial, energy, and transport markets. Its sales for the 12 months ended June 30, 2019 were $363. The purchase agreement was signed on October 28, 2019. The transaction is subject to fair value. The after-tax gain was $843. Eaton will account for its investment oncustomary closing conditions and is expected to close by the equity methodend of accounting.2019.
During 2015,On March 1, 2019, Eaton announced it plans to pursue a multi-year restructuring initiativetax-free spin-off of its Lighting business. On October 15, 2019, Eaton entered into an agreement to reducesell its cost structureLighting business to Signify N.V. for a cash purchase price of $1.4 billion. The decision to sell the Lighting business comes after completing a comprehensive review of various potential transaction alternatives. The Lighting business, which had sales of $1.7 billion in 2018 as part of the Electrical Products segment, serves customers in commercial, industrial, residential and gain efficiencies in allmunicipal markets. Eaton expects the Lighting business segmentsto be classified as held for sale during the fourth quarter of 2019. The transaction is subject to customary closing conditions and at corporate in orderregulatory approvals and is expected to respond to declining market conditions. Restructuring chargesclose in the thirdfirst quarter and first nine months of 2017 were $22 and $75, respectively, and were $23 and $121 in 2016, respectively. Charges from this initiative are primarily comprised of severance costs. Restructuring charges are anticipated2020.
On March 1, 2019, Eaton announced it plans to be $100 in 2017 and incremental savings in 2017 are anticipated to be $155.sell its Automotive Fluid Conveyance business.
RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operatingadjusted earnings, operatingadjusted earnings per ordinary share, and operating profit before acquisition integration and divestiture 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 operatingadjusted earnings and operatingadjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the table below. Operating profit before acquisition integration and divestiture charges is reconciled in the discussion of the operating results of each business segment, and excludes acquisition integration and divestiture expense related primarily to integrationthe planned divestiture of Ephesusthe Lighting Inc.business and the acquisitions of Ulusoy Elektrik and ISG discussed in 2017 and 2016 and Oxalis Group Ltd. in 2016.Note 2. 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 and divestiture charges, see Note 3 to the Condensed Consolidated Financial Statements.
Consolidated Financial Results
| | | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 | |
Net sales | $ | 5,211 |
| | $ | 4,987 |
| | 4.5 | % | | $ | 15,191 |
| | $ | 14,880 |
| | 2 | % | $ | 5,314 |
| | $ | 5,412 |
| | (2 | )% | | $ | 16,152 |
| | $ | 16,150 |
| | — | % |
Gross profit | 1,742 |
| | 1,616 |
| | 8 | % | | 4,962 |
| | 4,799 |
| | 3 | % | 1,802 |
| | 1,815 |
| | (1 | )% | | 5,370 |
| | 5,309 |
| | 1 | % |
Percent of net sales | 33.4 | % | | 32.4 | % | | | | 32.7 | % | | 32.3 | % | | | 33.9 | % | | 33.5 | % | | | | 33.2 | % | | 32.9 | % | | |
Income before income taxes | 1,691 |
| | 573 |
| | 195 | % | | 2,725 |
| | 1,568 |
| | 74 | % | 718 |
| | 439 |
| | 64 | % | | 2,059 |
| | 1,698 |
| | 21 | % |
Net income | 1,399 |
| | 522 |
| | 168 | % | | 2,347 |
| | 1,417 |
| | 66 | % | 602 |
| | 416 |
| | 45 | % | | 1,760 |
| | 1,514 |
| | 16 | % |
Less net loss (income) for noncontrolling interests | — |
| | 1 |
| | | | (1 | ) | | 1 |
| | | |
Less net income for noncontrolling interests | | (1 | ) | | — |
| | | | (1 | ) | | — |
| | |
Net income attributable to Eaton ordinary shareholders | 1,399 |
| | 523 |
| | 167 | % | | 2,346 |
| | 1,418 |
| | 65 | % | 601 |
| | 416 |
| | 44 | % | | 1,759 |
| | 1,514 |
| | 16 | % |
Excluding acquisition integration charges, after-tax (Note 3) | 1 |
| | 1 |
| | | | 2 |
| | 2 |
| | | |
Operating earnings | $ | 1,400 |
| | $ | 524 |
| | 167 | % | | $ | 2,348 |
| | $ | 1,420 |
| | 65 | % | |
Excluding acquisition integration and divestiture charges, after-tax (Note 3) | | 35 |
| | — |
| | | | 60 |
| | — |
| | |
Adjusted earnings | | $ | 636 |
| | $ | 416 |
| | 53 | % | | $ | 1,819 |
| | $ | 1,514 |
| | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 3.14 |
| | $ | 1.15 |
| | 173 | % | | $ | 5.23 |
| | $ | 3.09 |
| | 69 | % | $ | 1.44 |
| | $ | 0.95 |
| | 52 | % | | $ | 4.16 |
| | $ | 3.45 |
| | 21 | % |
Excluding per share impact of acquisition integration charges, after-tax (Note 3) | — |
| | — |
| | | | — |
| | — |
| | | |
Operating earnings per ordinary share | $ | 3.14 |
| | $ | 1.15 |
| | 173 | % | | $ | 5.23 |
| | $ | 3.09 |
| | 69 | % | |
Excluding per share impact of acquisition integration and divestiture charges, after-tax (Note 3) | | 0.08 |
| | — |
| | | | 0.14 |
| | — |
| | |
Adjusted earnings per ordinary share | | $ | 1.52 |
| | $ | 0.95 |
| | 60 | % | | $ | 4.30 |
| | $ | 3.45 |
| | 25 | % |
Net Sales
Net sales increased 4.5%decreased 2% in the third quarter of 20172019 compared to the third quarter of 20162018 due to an increasea decrease of 3.5%1% in organic sales and an increasea decrease of 1%1.5% from the impact of positivenegative currency translation.translation, partially offset by an increase of 0.5% from the acquisitions of businesses. The decrease in organic sales in the third quarter of 2019 was primarily due to lower sales volumes in the Vehicle and Hydraulics business segments, partially offset by higher sales volumes in the Electrical Products, Electrical Systems and Services, and Aerospace business segments. Net sales increased 2%were flat in the first nine months of 20172019 compared to the first nine months of 20162018 due to an increase of 2% in organic sales.sales, offset by a decrease of 2% from the impact of negative currency translation. Organic sales grew in the first nine months of 2019 due to higher sales volumes in the Electrical Products, Electrical Systems and Services, and Aerospace business segments, partially offset by lower sales volumes in the Vehicle and Hydraulics business segments.
Gross Profit
Gross profit margin increased from 33.5% in the third quarter of 2018 to 33.9% in the third quarter of 2019, and from 32.9% in the first nine months of 2018 to 33.2% in the first nine months of 2019. The increase in organic salesgross profit margin in the third quarter and first nine months of 20172019 was primarily due to higher sales volumes and other operating improvements in the Electrical Products Hydraulics, and VehicleElectrical Systems and Services business segments.
Gross Profit
Gross profit margin increased from 32.4% in the third quarter of 2016 to 33.4% in the third quarter of 2017,segments, and from 32.3% in the first nine months of 2016 to 32.7% in the first nine months of 2017. The increase in gross profit margin was primarily due to higher sales volumes savings from restructuring actions, and lower restructuring charges,favorable product mix in the Aerospace business segment, partially offset by commodity inflationlower sales volumes in the Vehicle and the impact of three recent hurricanes and the earthquake in Mexico City.Hydraulics business segments.
Income Taxes
The effective income tax rate for the third quarter and the first nine months of 20172019 was expense of 17.3%16.0% and 13.9%, respectively,14.5% compared to expense of 8.8%5.2% and 9.6%10.8% for the third quarter and first nine months of 2016. The tax rate for the third quarter and first nine months of 2017 includes $234 of tax expense on the gain related to the Eaton Cummins joint venture transaction, which closed during the third quarter and is discussed in Note 2. Excluding the impact from the Eaton Cummins joint venture transaction, the effective income tax rate for the third quarter and first nine months of 2017 was expense of 9.5% and 8.8%, respectively.2018. The increase in the effective tax rate in the third quarter and first nine months of 20172019 was primarily due to the inclusion of $69 of tax benefit on the arbitration decision expense recorded during the third quarter of 2018 (discussed in Note 9), as well as greater levels of income in higher tax jurisdictions. The decrease in the effective tax rate in the first nine months of 2017 was due to the resolution of tax contingencies in lower tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of ASU 2016-09 as discussed in Note 1.
Net Income
Net income attributable to Eaton ordinary shareholders of $1,399$601 in the third quarter of 20172019 increased 167%44% compared to Net income attributable to Eaton ordinary shareholders of $523$416 in the third quarter of 2016.2018. Net income attributableattributable to Eaton ordinary shareholders of $1,759 in the first nine months of 2017 was $2,346, an increase of65%2019 increased 16% compared to $1,418to Net income attributable to Eaton ordinary shareholders of $1,514 in the first nine months of 2016. The increase2018. Net income in 2018 included after-tax expense of $206 from the arbitration decision discussed in Note 9. Excluding this item, the decrease in the third quarter of 2019 was primarily due to lower sales volumes, higher acquisition integration and divestiture charges, and a higher effective income tax rate. Excluding the 2018 arbitration decision, the increase in the first nine months of 20172019 was primarily due to the $843 after-tax gain from the sale of business discussed in Note 2, higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by a higher effective income tax rate, commodity inflation, and the impact of three recent hurricanes and the earthquake in Mexico City.rate.
Net income per ordinary share in the third quarter and first nine months of 20172018 both included $1.89 and $1.88, respectively,$0.48 from the gain onimpact of the sale of businessarbitration decision discussed in Note 2.9. Net income per ordinary share increased to $3.14$1.44 in the third quarter of 20172019 compared to $1.15$0.95 in the third quarter of 2016.2018. Net incomeincome per ordinary share increased to $5.23 in the first nine months of 2017 compared to $3.09$4.16 in the first nine months of 2016.2019 compared to $3.45 in the first nine months of 2018. The increase in the Net income per ordinary share in the third quarter and first nine months of 2017 2019 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past year.
OperatingAdjusted Earnings
OperatingAdjusted earnings of $1,400$636 in the third quarter of 20172019 increased 167%53% compared to OperatingAdjusted earnings of $524$416 in the third quarter of 2016. Operating2018. Adjusted earnings of $1,819 in the first nine months of 2017 was $2,348, an increase of 65%2019 increased 20% compared to $1,420Adjusted earnings of $1,514 in the first nine months of 2016.2018. The increase in OperatingAdjusted earnings in the third quarter and the first nine months of 20172019 was primarily due to higher Net income attributable to Eaton ordinary shareholders.shareholders excluding higher acquisition integration and divestiture charges.
OperatingAdjusted earnings per ordinary share increased to $3.14$1.52 in the third quarter of 20172019 compared to $1.15$0.95 in the third quarter of 2016. Operating2018. Adjusted earnings per ordinary share increased to $5.23$4.30 first nine months of 2019 compared to $3.45 in the first nine months of 2017 compared to $3.09 in the first nine months of 2016.2018. The increase in OperatingAdjusted earnings per ordinary share in the third quarter and first nine months of 20172019 was due to higher OperatingAdjusted earnings and the impact of the Company's share repurchases over the past year.
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration and divestiture charges. For additional information related to acquisition integration and divestiture charges, see Note 3 to the Condensed Consolidated Financial Statements.
Electrical Products
| | | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 | |
Net sales | $ | 1,857 |
| | $ | 1,767 |
| | 5 | % | | $ | 5,371 |
| | $ | 5,231 |
| | 3 | % | $ | 1,786 |
| | $ | 1,789 |
| | — | % | | $ | 5,395 |
| | $ | 5,327 |
| | 1 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | $ | 346 |
| | $ | 331 |
| | 5 | % | | $ | 957 |
| | $ | 924 |
| | 4 | % | $ | 358 |
| | $ | 343 |
| | 4 | % | | $ | 1,050 |
| | $ | 984 |
| | 7 | % |
Operating margin | 18.6 | % | | 18.7 | % | | | | 17.8 | % | | 17.7 | % | | | 20.0 | % | | 19.2 | % | | | | 19.5 | % | | 18.5 | % | | |
| | | | | | | | | | | | | | | | | | | | | | |
Acquisition integration charges | $ | 1 |
| | $ | 1 |
| | | | $ | 3 |
| | $ | 2 |
| | | |
Acquisition integration and divestiture charges | | $ | 4 |
| | $ | — |
| | | | $ | 6 |
| | $ | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | | |
Before acquisition integration and divestiture charges | | | | | | | | | | | | |
Operating profit | $ | 347 |
| | $ | 332 |
| | 5 | % | | $ | 960 |
| | $ | 926 |
| | 4 | % | $ | 362 |
| | $ | 343 |
| | 6 | % | | $ | 1,056 |
| | $ | 984 |
| | 7 | % |
Operating margin | 18.7 | % | | 18.8 | % | | | | 17.9 | % | | 17.7 | % | | | 20.3 | % | | 19.2 | % | | | | 19.6 | % | | 18.5 | % | | |
Net sales increased 5%were flat in the third quarter of 20172019 compared to the third quarter of 20162018 due to an increase of 4%1% in organic sales, offset by a decrease of 1% from the impact of negative currency translation. Organic sales grew in the third quarter of 2019 primarily driven by strength in residential and commercial construction markets in North America, partially offset by a decline in industrial controls globally. Net sales increased 1% in the first nine months of 2019 compared to the first nine months of 2018 due to an increase of 3% in organic sales, partially offset by a decrease of 2% from the impact of negative currency translation. Organic sales grew in the first of nine months of 2019 in North America, primarily driven by growth in commercial, residential and industrial applications.
The operating margin increased from 19.2% in the third quarter of 2018 to 20.0% in the third quarter of 2019 and from 18.5% in the first nine months of 2018 to 19.5% in the first nine months of 2019 primarily due to higher sales volumes and other operating improvements.
The operating margin before acquisition integration and divestiture charges increased from 19.2% in the third quarter of 2018 to 20.3% in the third quarter of 2019 and from 18.5% in the first nine months of 2018 to 19.6% in the first nine months of 2019 primarily due to an increase in the operating margin.
Electrical Systems and Services
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2019 | | 2018 | | | 2019 | | 2018 | |
Net sales | $ | 1,572 |
| | $ | 1,519 |
| | 3 | % | | $ | 4,618 |
| | $ | 4,413 |
| | 5 | % |
| | | | | | | | | | | |
Operating profit | $ | 284 |
| | $ | 234 |
| | 21 | % | | $ | 751 |
| | $ | 628 |
| | 20 | % |
Operating margin | 18.1 | % | | 15.4 | % | | | | 16.3 | % | | 14.2 | % | | |
| | | | | | | | | | | |
Acquisition integration and divestiture charges | $ | 3 |
| | $ | — |
| | | | $ | 4 |
| | $ | — |
| | |
| | | | | | | | | | | |
Before acquisition integration and divestiture charges | | | | | | | | | | | |
Operating profit | $ | 287 |
| | $ | 234 |
| | 23 | % | | $ | 755 |
| | $ | 628 |
| | 20 | % |
Operating margin | 18.3 | % | | 15.4 | % | | | | 16.3 | % | | 14.2 | % | | |
Net sales increased 3% in the third quarter of 2019 compared to the third quarter of 2018 due to an increase of 3% in organic sales and an increase of 1.5% from the acquisitions of businesses, partially offset by a decrease of 1.5% from the impact of negative currency translation. The increase in organic sales in the third quarter of 2019 was primarily driven by strength in data centers, commercial construction and engineering services. Net sales increased 5%in the first nine months of 2019 compared to the first nine months of 2018 due to an increase of 5% in organic sales and an increase of 1% from the acquisition of a business, partially offset by a decrease of 1% from the impact of positivenegative currency translation. NetThe increase in organic sales increased 3% in the first nine months of 20172019 was primarily driven by strength in commercial construction, industrial projects and data centers.
The operating margin increased from 15.4% in the third quarter of 2018 to 18.1% in the third quarter of 2019 and from 14.2% in the first nine months of 2018 to 16.3% in the first nine months of 2019 primarily due to higher sales volumes and other operating improvements.
The operating margin before acquisition integration and divestiture charges increased from 15.4% in the third quarter of 2018 to 18.3% in the third quarter of 2019 and from 14.2% in the first nine months of 2018 to 16.3% in the first nine months of 2019 primarily due to an increase in the operating margin.
Hydraulics
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2019 | | 2018 | | | 2019 | | 2018 | |
Net sales | $ | 603 |
| | $ | 670 |
| | (10 | )% | | $ | 1,987 |
| | $ | 2,103 |
| | (6 | )% |
| | | | | | | | | | | |
Operating profit | $ | 72 |
| | $ | 94 |
| | (23 | )% | | $ | 232 |
| | $ | 285 |
| | (19 | )% |
Operating margin | 11.9 | % | | 14.0 | % | | | | 11.7 | % | | 13.6 | % | | |
Net sales decreased 10% in the third quarter of 2019 compared to the third quarter of 2018 due to a decrease of 8% in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 6% in the first nine months of 2019 compared to the first nine months of 2016 due to an increase of 3% in organic sales. Organic sales growth in the third quarter and first nine months of 2017 was driven by growth in the Americas and Europe.
Operating margin decreased from 18.7% in the third quarter of 2016 to 18.6% in the third quarter of 2017 primarily due to the impact of recent natural disasters and commodity inflation, partially offset by higher sales volumes and savings from restructuring actions. Operating margin increased from17.7% in the first nine months of 2016 to 17.8% in the first nine months of 2017 primarily due to higher sales volumes, savings from restructuring actions and lower restructuring charges, partially offset by commodity inflation and the impact of recent natural disasters.
Operating margin before acquisition integration charges decreased from 18.8% in the third quarter of 2016 to 18.7% in the third quarter of 2017 due to a decrease in operating margin. Operating margin before acquisition integration charges increased from 17.7% in the first nine months of 2016 to 17.9% in the first nine months of 2017 due to an increase in operating margin.
Electrical Systems and Services
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | | 2017 | | 2016 | |
Net sales | $ | 1,421 |
| | $ | 1,436 |
| | (1 | )% | | $ | 4,168 |
| | $ | 4,207 |
| | (1 | )% |
| | | | | | | | | | | |
Operating profit | $ | 196 |
| | $ | 197 |
| | (1 | )% | | $ | 545 |
| | $ | 534 |
| | 2 | % |
Operating margin | 13.8 | % | | 13.7 | % | | | | 13.1 | % | | 12.7 | % | | |
| | | | | | | | | | | |
Acquisition integration charges | $ | — |
| | $ | — |
| | | | $ | — |
| | $ | 1 |
| | |
| | | | | | | | | | | |
Before acquisition integration charges | | | | | | | | | | | |
Operating profit | $ | 196 |
| | $ | 197 |
| | (1 | )% | | $ | 545 |
| | $ | 535 |
| | 2 | % |
Operating margin | 13.8 | % | | 13.7 | % | | | | 13.1 | % | | 12.7 | % | | |
Net sales decreased 1% in the third quarter of 2017 compared to the third quarter of 20162018 due to a decrease of 2%3% in organic sales partially offset by an increase of 1%and 3% from the impact of positivenegative currency translation. Net sales decreased 1% in the first nine months of 2017 compared to the first nine months of 2016 due to a decrease of 1% in organic sales. The decrease in organic sales in the third quarter and first nine months of 20172019 was primarily due to softnessweakness in North American assembly markets.global mobile equipment markets and destocking at both OEMs and distributors.
OperatingThe operating margin increaseddecreased from 13.7%14.0% in the third quarter of 20162018 to 13.8%11.9% in the third quarter of 2017. Operating margin increased2019 and from 12.7%13.6% in the first nine months of 20162018 to 13.1%11.7% in the first nine months of 2017. These increases are2019 primarily due to savings from restructuring actionslower sales volumes, unfavorable product mix and lower restructuring charges,operating inefficiencies.
Aerospace
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2019 | | 2018 | | | 2019 | | 2018 | |
Net sales | $ | 513 |
| | $ | 478 |
| | 7 | % | | $ | 1,532 |
| | $ | 1,399 |
| | 10 | % |
| | | | | | | | | | | |
Operating profit | $ | 129 |
| | $ | 105 |
| | 23 | % | | $ | 372 |
| | $ | 284 |
| | 31 | % |
Operating margin | 25.1 | % | | 22.0 | % | | | | 24.3 | % | | 20.3 | % | | |
Net sales increased 7% in the third quarter of 2019 compared to the third quarter of 2018 due to an increase of 8% in organic sales, partially offset by commodity inflation.
Operating margin before acquisition integration chargesa decrease of 1% from the impact of negative currency translation. Net sales increased from 12.7%10% in the first nine months of 2016 to 13.1% in the first nine months of 2017 due to an increase in operating margin.
Hydraulics
|
| | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | | 2017 | | 2016 | |
Net sales | $ | 634 |
| | $ | 562 |
| | 13 | % | | $ | 1,854 |
| | $ | 1,702 |
| | 9 | % |
| | | | | | | | | | | |
Operating profit | $ | 80 |
| | $ | 61 |
| | 31 | % | | $ | 214 |
| | $ | 161 |
| | 33 | % |
Operating margin | 12.6 | % | | 10.9 | % | | | | 11.5 | % | | 9.5 | % | | |
Net sales increased 13% in the third quarter of 2017 compared to the third quarter of 2016 due to an increase of 13% in organic sales. Net sales increased 9% in the first nine months of 20172019 compared to the first nine months of 20162018 due to an increase of 10%11% in organic sales, partially offset by a decrease of 1% from the impact of negative currency translation. The increase in organic sales in the third quarter and first nine months of 20172019 was primarily due to strength in globalthe commercial OEM marketsmarket and distribution channels.the commercial aftermarket.
OperatingThe operating margin increased from 10.9%22.0% in the third quarter of 20162018 to 12.6%25.1% in the third quarter of 20172019 and from 20.3% in the first nine months of 2018 to 24.3% in the first nine months of 2019 primarily due to higher sales volumes partially offset by commodity inflation. Operating margin increased from 9.5% in the first nine months of 2016 to 11.5% in the first nine months of 2017 primarily due to higher sales volumes, savings from restructuring actions and lower restructuring charges, partially offset by commodity inflation.favorable product mix.
AerospaceVehicle
| | | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 | |
Net sales | $ | 438 |
| | $ | 436 |
| | — | % | | $ | 1,303 |
| | $ | 1,328 |
| | (2 | )% | $ | 761 |
| | $ | 876 |
| | (13 | )% | | $ | 2,374 |
| | $ | 2,668 |
| | (11 | )% |
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | $ | 84 |
| | $ | 88 |
| | (5 | )% | | $ | 244 |
| | $ | 251 |
| | (3 | )% | $ | 139 |
| | $ | 166 |
| | (16 | )% | | $ | 397 |
| | $ | 464 |
| | (14 | )% |
Operating margin | 19.2 | % | | 20.2 | % | | | | 18.7 | % | | 18.9 | % | | | 18.3 | % | | 18.9 | % | | | | 16.7 | % | | 17.4 | % | | |
Net sales were flatdecreased 13% in the third quarter of 20172019 compared to the third quarter of 2016 with no change in organic sales or currency translation. Net sales decreased 2% in the first nine months of 2017 compared to the first nine months of 20162018 due to a decrease of 1%12% in organic sales and a decrease of 1% from the impact of negative currency translation. Net sales decreased 11% in the first nine months of 2019 compared to the first nine months of 2018 due to a decrease of 9% in organic sales and a decrease of 2% from the impact of negative currency translation. The decrease in organic sales in the third quarter and first nine months of 20172019 was primarily duedriven by weakness in global light vehicle markets and revenues transferring over to lower sales in military aftermarket, business and regional jets, and lower cost reimbursements on certain engineering programs, partially offset by growth in commercial transports.the Eaton Cummins Automated Transmission Technologies joint venture.
Operating margin decreased from 20.2% in the third quarter of 2016 to 19.2% in third quarter of 2017 primarily due to unfavorable product mix. OperatingThe operating margin decreased from 18.9% in the first nine monthsthird quarter of 20162018 to 18.7%18.3% in the third quarter of 2019and from 17.4% in the first nine months of 20172018 to 16.7% in the first nine months of 2019 primarily due to lower sales volumes and unfavorable product mix, partially offset by savings from restructuring actions.volumes.
VehicleeMobility
| | | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 | |
Net sales | $ | 861 |
| | $ | 786 |
| | 10 | % | | $ | 2,495 |
| | $ | 2,412 |
| | 3 | % | $ | 79 |
| | $ | 80 |
| | (1 | )% | | $ | 246 |
| | $ | 240 |
| | 3 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Operating profit | $ | 150 |
| | $ | 122 |
| | 23 | % | | $ | 397 |
| | $ | 377 |
| | 5 | % | $ | 4 |
| | $ | 10 |
| | (60 | )% | | $ | 16 |
| | $ | 35 |
| | (54 | )% |
Operating margin | 17.4 | % | | 15.5 | % | | | | 15.9 | % | | 15.6 | % | | | 5.1 | % | | 12.5 | % | | | | 6.5 | % | | 14.6 | % | | |
Net sales increased 10%decreased 1% in the third quarter of 20172019 compared to the third quarter of 20162018 due to an increase of 9% in organic sales and an increase of 2% from the impact of positive currency translation, partially offset by a decrease of 1% from the saleimpact of a business discussed in Note 2. The increase in organic sales in the third quarter of 2017 was driven by growth in all regions, with particular strength in the North American Class 8 truck market.negative currency translation. Net sales increased 3% in the first nine months of 20172019 compared to the first nine months of 20162018 due to an increase of 2%4% in organic sales, and an increasepartially offset by a decrease of 1% from the impact of positivenegative currency translation. The increase in organic sales in the first nine months of 20172019 was primarily due to growth in North America.
OperatingThe operating margin increaseddecreased from 15.5%12.5% in the third quarter of 20162018 to 17.4%5.1% in the third quarter of 2017 primarily due to higher sales volumes. Operating margin increased2019 and from 15.6%14.6% in the first nine months of 20162018 to 15.9%6.5% in the first nine months of 2017 2019 primarily due to higher sales volumes, savings from restructuring actionsincreased research and lower restructuring costs, partially offset by unfavorable product mix and commodity inflation.
development costs.
Corporate Expense (Income)
| | | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) | Three months ended September 30 | | Increase (decrease) | | Nine months ended September 30 | | Increase (decrease) |
| 2017 | | 2016 | | 2017 | | 2016 | | 2019 | | 2018 | | 2019 | | 2018 | |
Amortization of intangible assets | $ | 98 |
| | $ | 99 |
| | (1 | )% | | $ | 288 |
| | $ | 297 |
| | (3 | )% | $ | 93 |
| | $ | 95 |
| | (2 | )% | | $ | 280 |
| | $ | 289 |
| | (3 | )% |
Interest expense - net | 60 |
| | 59 |
| | 2 | % | | 181 |
| | 173 |
| | 5 | % | 54 |
| | 67 |
| | (19 | )% | | 183 |
| | 205 |
| | (11 | )% |
Pension and other postretirement benefits expense | 16 |
| | 18 |
| | (11 | )% | | 38 |
| | 45 |
| | (16 | )% | 5 |
| | 3 |
| | 67 | % | | 7 |
| | 4 |
| | 75 | % |
Gain on sale of business
| (1,077 | ) | | — |
| | NM |
| | (1,077 | ) | | — |
| | NM |
| |
Arbitration decision expense | | — |
| | 275 |
| | NM |
| | — |
| | 275 |
| | NM |
|
Other corporate expense - net | 68 |
| | 50 |
| | 36 | % | | 202 |
| | 164 |
| | 23 | % | 116 |
| | 73 |
| | 59 | % | | 289 |
| | 209 |
| | 38 | % |
Total corporate expense (income) | $ | (835 | ) | | $ | 226 |
| | (469 | )% | | $ | (368 | ) | | $ | 679 |
| | (154 | )% | |
Total corporate expense | | $ | 268 |
| | $ | 513 |
| | (48 | )% | | $ | 759 |
| | $ | 982 |
| | (23 | )% |
Total corporate incomeexpense was $835$268 in the third quarter of 20172019 compared to corporate expense of $226$513 in the third quarter of 2016.2018. Total corporate incomeexpense was $368$759 in the first nine months of 20172019 compared to corporate expense of $679$982 in the first nine months of 2016.2018. The changedecrease in Total corporate expense (income) for the third quarter and first nine months of 20172019 was primarily due to a gain on sale of businessthe 2018 arbitration decision discussed in Note 2,9, partially offset by an increasehigher acquisition integration and divestiture charges discussed in other corporate expense - net driven by an increase to the LIFO inventory reserve and higher corporate restructuring expenses.Note 2.
LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Financial Condition and Liquidity
Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk. The Company maintains access to the commercial paper markets through a $2,000 commercial paper program, which is supported by credit facilities in the aggregate principal amount of $2,000. There were no borrowings outstanding under these revolving credit facilities at September 30, 2017.2019. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business as well as scheduled payments of long-term debt.
On September 15, 2017,May 14, 2019, a subsidiary of Eaton issued senioreuro denominated notes (the(2019 Euro Notes) with a face amountvalue of $1,000.€1,100 ($1,232 based on the May 14, 2019 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2019 Euro Notes are comprised of two tranches of $700€600 and $300€500, which mature in 20272021 and 2047,2025, respectively, with interest payable semi-annuallyannually at a respective rate of 3.1%0.02% and 3.9%0.70%. The issuer received proceeds totaling $993€1,097 ($1,229 based on the May 14, 2019 spot rate) from the issuance, net of financing costs.costs and discounts.
Eaton was 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 $1,787$2,514 in the first nine months of 2017, a decrease2019, an increase of $145$676 in the source of cash compared to $1,932$1,838 in the first nine months of 2016.2018. The decreaseincrease in net cash provided by operating activities in the first nine months of 20172019 was driven by higher pension contributions, including $350 contributednet income compared to Eaton's U.S. qualified pension plans, partially offset by a lower increase in working capital.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.
Investing Cash Flow
Net cash used in investing activities was $435$832 in the first nine months of 2017,2019, an increase in the use of cash of $64$576 compared to $371$256 in the first nine monthsmonths of 2016.2018. The increase in the use of cash was primarily driven by an increase in net purchases of short-term investments of $621$132 in 20172019 compared to $29net sales of $329 in 2016,2018, and cash paid for business acquisitions discussed in Note 2, partially offset by $26 of net proceeds in 2019 compared to net payments of $600$122 in 2018 from the salesettlement of a businesscurrency exchange contracts not designated as hedges discussed in Note 2.13.
Financing Cash Flow
Net cash used in financing activities was $1,115$1,423 in the first nine months of 2017,2019, a decrease of $228$445 in the use of cash compared to $1,343$1,868 in the first nine months of 2016.2018. The decrease in the use of cash was primarily due to an increase of $367 inhigher proceeds from borrowings which totaled $1,000of $1,232 in 20172019 compared to $80 in 2018, partially offset by higher share repurchases of $978 in 2019 compared to $600 in 2018, and $633 in 2016, and a decrease of $113 inhigher payments on borrowings which totaled $553of $757 in 2017 and $666 in 2016. This was partially offset by a $222 increase in share repurchases during the first nine months of 20172019 compared to the first nine months of 2016.$486 in 2018.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning expected pension contributions,the anticipated stock repurchases, the impactcompletion of the adoptiondivestiture of ASU 2014-09,our Lighting business, the anticipated completion of the acquisition of Souriau-Sunbank Connection Technologies and the costs and benefits of restructuring actions,legal contingencies, among other matters. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unexpected results from the implementation of ASU 2014-09, unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the potential effects on our businesses from natural disasters; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; war, 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.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
There have been no material changes in exposures to market risk since December 31, 2016.2018.
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ITEM 4. | CONTROLS AND PROCEDURES. |
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Craig Arnold - Principal Executive Officer; and Richard H. Fearon - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of September 30, 20172019.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
During the third quarter of 2017,2019, there was no change in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
PART II — OTHER INFORMATION
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ITEM 1. | LEGAL PROCEEDINGS. |
Information regarding the Company's current legal proceedings is presented in Note 89 of the Notes to the Condensed Consolidated Financial Statements.
“Item 1A. Risk Factors” in Eaton's 20162018 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 20162018 Form 10-K.
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ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS. |
(c) Issuer's Purchases of Equity Securities
During the third quarter of 2017, 4.42019, 6.8 million ordinary shares were repurchased in the open market at a total cost of $324$539 million. These shares were repurchased under the program approved by the Board on February 24, 2016.27, 2019 (the 2019 Program). A summary of the shares repurchased in the third quarter of 20172019 follows:
| | Month | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) | | 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) |
July | | — |
| | $ | — |
| | — |
| | $ | 1,388 |
| | 780,496 |
| | $ | 82.87 |
| | 780,496 |
| | $ | 4,292 |
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August | | 4,415,144 |
| | $ | 73.29 |
| | 4,415,144 |
| | $ | 1,064 |
| | 5,667,541 |
| | $ | 78.32 |
| | 5,667,541 |
| | $ | 4,227 |
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September | | — |
| | $ | — |
| | — |
| | $ | 1,064 |
| | 384,208 |
| | $ | 78.08 |
| | 384,208 |
| | $ | 3,783 |
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Total | | 4,415,144 |
| | $ | 73.29 |
| | 4,415,144 |
| | | | 6,832,245 |
| | $ | 78.82 |
| | 6,832,245 |
| | 3,753 |
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ITEM 5. | OTHER INFORMATION. |
Disclosure Pursuant to Section 13r 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 Quarterly Report, we are filing a notice pursuant to Section 13(r) of the Exchange Act that such matters have been disclosed in this Quarterly Report.
During the third quarter, certain of our wholly-owned non-U.S. subsidiaries sold various electrical products to customers in Iran. We received total revenue of approximately 1,015,072 Euros and realized net profits of approximately 282,649 Euros from the sales (approximately $1,197,983 and $333,581 in whole U.S. dollars, respectively). One or more of our non-U.S. subsidiaries intend to continue doing business in Iran under General License H in compliance with U.S. economic sanctions and export control laws, though the Company has no assets or employees in Iran.
Exhibits — See Exhibit Index attached.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | EATON CORPORATION plc | |
| | | Registrant | |
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Date: | October 31, 2017 | By: | /s/ Richard H. Fearon | |
| | | Richard H. Fearon | |
| | | Principal Financial Officer |
| | | (On behalf of the registrant and as Principal Financial Officer) |
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Eaton Corporation plc
Third Quarter 20172019 Report on Form 10-Q
Exhibit Index
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3 (i) | | |
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3 (ii) | | |
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4.1 | | |
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4.2 | | |
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4.3 | | |
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4.4 | | |
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4.5 | | |
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4.6 | | |
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4.7 | | 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 4.1-4.3(4.1 - 4.6) hereto |
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12 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. * |
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101.SCH | | XBRL Taxonomy Extension Schema Document * |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document * |
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101.DEF | | XBRL Taxonomy Extension Label Definition Document * |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document * |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document * |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
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* | | Submitted electronically herewith. |
Attached as Exhibit 101
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report areto be signed on its behalf by the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended September 30, 2017 and 2016, (ii) Consolidated Statements of Comprehensive Income for the three months ended September 30, 2017 and 2016, (iii) Condensed Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016 and (v) Notes to Condensed Consolidated Financial Statements for the nine months ended September 30, 2017.undersigned, thereunto duly authorized.
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| | | EATON CORPORATION plc | |
| | | Registrant | |
| | | | |
Date: | October 29, 2019 | By: | /s/ Richard H. Fearon | |
| | | Richard H. Fearon | |
| | | Principal Financial Officer |
| | | (On behalf of the registrant and as Principal Financial Officer) |