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Table of Contents

 
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 March 31, 2019
Commission file number 000-54863
EATON CORPORATION plc
(Exact name of registrant as specified in its charter)
Ireland
 
98-1059235
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
 
 
Eaton House, 30 Pembroke Road, Dublin 4, Ireland
 
D04 Y0C2
(Address of principal executive offices)
 
(Zip Code)
 
 
 
+353 1637 2900
 
 
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not applicable
 
 
 
 
 
 
(Former name, former address and former fiscal year if changed since last report)
 
 
 
 
 
 
 
 
 

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):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 423.1 million Ordinary Shares outstanding as of March 31, 2019.
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 



Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME

 
Three months ended
March 31
(In millions except for per share data)
2019
 
2018
Net sales
$
5,305

 
$
5,251

 
 
 
 
Cost of products sold
3,573

 
3,573

Selling and administrative expense
917

 
889

Research and development expense
156

 
156

Interest expense - net
66

 
70

Other income - net
(10
)
 
(2
)
Income before income taxes
603

 
565

Income tax expense
81

 
78

Net income
522

 
487

Less net loss for noncontrolling interests

 
1

Net income attributable to Eaton ordinary shareholders
$
522

 
$
488

 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
Diluted
$
1.23

 
$
1.10

Basic
1.23

 
1.11

 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
Diluted
425.9

 
441.7

Basic
424.0

 
438.8

 
 
 
 
Cash dividends declared per ordinary share
$
0.71

 
$
0.66


The accompanying notes are an integral part of these condensed consolidated financial statements.

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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three months ended
March 31
(In millions)
2019
 
2018
Net income
$
522

 
$
487

Less net loss for noncontrolling interests

 
1

Net income attributable to Eaton ordinary shareholders
522

 
488

 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
Currency translation and related hedging instruments
53

 
257

Pensions and other postretirement benefits
21

 
26

Cash flow hedges
(7
)
 
13

Other comprehensive (loss) income attributable to Eaton
   ordinary shareholders
67

 
296

 
 
 
 
Total comprehensive income attributable to Eaton
  ordinary shareholders
$
589

 
$
784


The accompanying notes are an integral part of these condensed consolidated financial statements.


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EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS

(In millions)
March 31,
2019
 
December 31,
2018
Assets
 
 
 
Current assets
 
 
 
Cash
$
303

 
$
283

Short-term investments
143

 
157

Accounts receivable - net
3,865

 
3,858

Inventory
2,897

 
2,785

Prepaid expenses and other current assets
536

 
507

Total current assets
7,744

 
7,590

 
 
 
 
Property, plant and equipment
 
 
 
Land and buildings
2,457

 
2,466

Machinery and equipment
6,145

 
6,106

Gross property, plant and equipment
8,602

 
8,572

Accumulated depreciation
(5,129
)
 
(5,105
)
Net property, plant and equipment
3,473

 
3,467

 
 
 
 
Other noncurrent assets
 
 
 
Goodwill
13,318

 
13,328

Other intangible assets
4,754

 
4,846

Operating lease assets
420

 

Deferred income taxes
309

 
293

Other assets
1,631

 
1,568

Total assets
$
31,649

 
$
31,092

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
741

 
$
414

Current portion of long-term debt
42

 
339

Accounts payable
2,274

 
2,130

Accrued compensation
302

 
457

Other current liabilities
1,927

 
1,814

Total current liabilities
5,286

 
5,154

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
6,782

 
6,768

Pension liabilities
1,265

 
1,304

Other postretirement benefits liabilities
320

 
321

Operating lease liabilities
308

 

Deferred income taxes
360

 
349

Other noncurrent liabilities
1,061

 
1,054

Total noncurrent liabilities
10,096

 
9,796

 
 
 
 
Shareholders’ equity
 
 
 
Ordinary shares (423.1 million outstanding in 2019 and 423.6 million in 2018)
4

 
4

Capital in excess of par value
12,085

 
12,090

Retained earnings
8,225

 
8,161

Accumulated other comprehensive loss
(4,078
)
 
(4,145
)
Shares held in trust
(3
)
 
(3
)
Total Eaton shareholders’ equity
16,233

 
16,107

Noncontrolling interests
34

 
35

Total equity
16,267

 
16,142

Total liabilities and equity
$
31,649

 
$
31,092

The accompanying notes are an integral part of these condensed consolidated financial statements.

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EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three months ended
March 31
(In millions)
2019
 
2018
Operating activities
 
 
 
Net income
$
522

 
$
487

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
221

 
230

Deferred income taxes
(3
)
 
(12
)
Pension and other postretirement benefits expense
36

 
43

Contributions to pension plans
(39
)
 
(40
)
Contributions to other postretirement benefits plans
(5
)
 
(5
)
Changes in working capital
(306
)
 
(459
)
Other - net
125

 
95

Net cash provided by operating activities
551

 
339

 
 
 
 
Investing activities
 

 
 
Capital expenditures for property, plant and equipment
(149
)
 
(131
)
Sales of short-term investments - net
16

 
31

Proceeds for settlement of currency exchange contracts not designated as hedges - net
51

 

Other - net
14

 
(37
)
Net cash used in investing activities
(68
)
 
(137
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
342

 
179

Payments on borrowings
(315
)
 
(33
)
Cash dividends paid
(302
)
 
(284
)
Exercise of employee stock options
20

 
19

Repurchase of shares
(180
)
 
(300
)
Employee taxes paid from shares withheld
(35
)
 
(23
)
Other - net
(1
)
 
(1
)
Net cash used in financing activities
(471
)
 
(443
)
 
 
 
 
Effect of currency on cash
8

 
(3
)
Total increase (decrease) in cash
20

 
(244
)
Cash at the beginning of the period
283

 
561

Cash at the end of the period
$
303

 
$
317


The accompanying notes are an integral part of these condensed consolidated financial statements.

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EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
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 2018 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.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Leases
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 2019 using the optional transition method and has not restated prior periods. The Company elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification of existing leases. The Company recorded a cumulative-effect adjustment of less than $1 to retained earnings as of January 1, 2019. Additionally, the adoption of the new standard resulted in the recording of lease assets and lease liabilities for operating leases of $435 and $446, respectively, as of January 1, 2019. The adoption of the standard did not have a material impact to the Consolidated 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 the first quarter 2019 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 report hedge ineffectiveness, expands the ability to hedge specific risk components, and generally requires the change in value of the hedge instrument and hedged item to be presented in the same 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.


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Note 2.
ACQUISITION AND DIVESTITURES OF BUSINESSES
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., 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.
Spin-off of Lighting business
On March 1, 2019, Eaton announced it plans to pursue a tax-free spin-off of its Lighting business. The spin-off will create an independent, publicly traded company and is expected to be completed by the end of 2019.
Plan to divest Automotive Fluid Conveyance business
On March 1, 2019, Eaton announced it plans to sell its 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 businesses. A summary of these charges follows:
 
Three months ended
March 31
 
2019
 
2018
Electrical Products
$
1

 
$

Corporate
11

 

Total acquisition integration and divestiture charges before income tax
12

 

Income taxes
1

 

Total after income taxes
$
11

 
$

Per ordinary share - diluted
$
0.03

 
$

Business segment charges in 2019 related to the planned spin-off of the Lighting business and were included in Selling and administrative expense. In Business Segment Information, the charges reduced Operating profit of the related business segment.
Corporate charges in 2019 related primarily to the planned spin-off of the Lighting business and were included in Selling and administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.
See Note 14 for additional information about business segments.




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Note 4.
REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.
The Company’s six operating segments and the following tables disaggregate sales by lines of businesses, geographic destination, market channel or end market.
 
Three months ended March 31, 2019
Net sales
United States
 
Rest of World
 
Total
Electrical Products
$
1,047

 
$
713

 
$
1,760

Electrical Systems and Services
976

 
488

 
1,464

Hydraulics
290

 
396

 
686

 
 
 
 
 
 
 
Original Equipment Manufacturers
 
Aftermarket, Distribution and End User
 

Aerospace
$
287

 
$
215

 
502

 
 
 
 
 

 
Commercial
 
 Passenger and Light Duty
 

Vehicle
$
431

 
$
379

 
810

 
 
 
 
 
 
eMobility
 
 
 
 
83

 

 

 

Total
 
 
 
 
$
5,305

 
Three months ended March 31, 2018
Net sales
United States
 
Rest of World
 
Total
Electrical Products
$
960

 
$
772

 
$
1,732

Electrical Systems and Services
894

 
487

 
1,381

Hydraulics
297

 
413

 
710

 
 
 
 
 
 
 
Original Equipment Manufacturers
 
Aftermarket, Distribution and End User
 
 
Aerospace
$
264

 
$
194

 
458

 
 
 
 
 
 
 
Commercial
 
 Passenger and Light Duty
 
 
Vehicle
$
430

 
$
463

 
893

 
 
 
 
 
 
eMobility
 
 
 
 
77

 
 
 
 
 
 
Total
 
 
 
 
$
5,251


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The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of revenue recognized). Accounts receivables from customers were $3,469 and $3,402 at March 31, 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 $104 and $94 at March 31, 2019 and December 31, 2018, respectively, and are recorded in Prepaid expenses and other 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 quarter.
Changes in the deferred revenue liabilities are as follows:
 
Deferred Revenue
Balance at December 31, 2018
$
248

Customer deposits and billings
208

Revenue recognized in the period
(205
)
Translation
6

Balance at March 31, 2019
$
257

 
Deferred Revenue
Balance at January 1, 2018
$
227

Customer deposits and billings
232

Revenue recognized in the period
(209
)
Translation
1

Balance at March 31, 2018
$
251

A significant portion of open orders placed with Eaton are by original equipment manufacturers or distributors. These open orders are not considered firm as they have been historically subject to releases by customers. In measuring backlog of unsatisfied or partially satisfied obligations, only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at March 31, 2019 and December 31, 2018 was approximately $5.5 billion and $5.3 billion, respectively. At both March 31, 2019 and December 31, 2018, Eaton expects to recognize approximately 87% of this backlog in the next twelve months and the rest thereafter.

Note 5.
GOODWILL
Change in the carrying amount of goodwill by segment follows:
 
December 31,
2018
 
Translation
 
March 31,
2019
Electrical Products
$
6,562

 
$
(11
)
 
$
6,551

Electrical Systems and Services
4,241

 
8

 
4,249

Hydraulics
1,212

 
(9
)
 
1,203

Aerospace
941

 
3

 
944

Vehicle
292

 
(1
)
 
291

eMobility
80

 

 
80

Total
$
13,328

 
$
(10
)
 
$
13,318



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Note 6.
LEASES
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 residual value guarantees or restrictive covenants, and payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The components of lease expense follows:
 
Three months ended March 31, 2019
Operating lease cost
$
42

Finance lease cost - amortization of lease assets
1

Short-term lease cost
13

Variable lease cost
4

Sublease income
(1
)
Total lease cost
$
59

The net gain recorded on sale leaseback transactions for the three months ended March 31, 2019 was $18.
Supplemental cash flow information related to leases follows:
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash outflows - payments on operating leases
$
(38
)
Financing cash outflows - payments on finance lease obligations
(1
)

 
Lease assets obtained in exchange for new lease obligations:
 
Operating leases
$
21

Finance leases
8


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Supplemental balance sheet information related to leases follows:
 
March 31, 2019

Operating Leases
 
Operating lease assets
$
420

 
 
Other current liabilities
124

Operating lease liabilities
308

Total operating lease liabilities
$
432

 
 
Finance Leases
 
Land and buildings
$
18

Machinery and equipment
8

Accumulated depreciation
(11
)
Net property, plant and equipment
$
15

 
 
Current portion of long-term debt
$
4

Long-term debt
12

Total finance lease liabilities
$
16

 
 
Weighted-average remaining lease term
 
Operating leases
5.1 years

Finance leases
4.7 years

 
 
Weighted-average discount rate
 
Operating leases
3.6
%
Finance leases
6.9
%
Maturities of lease liabilities at March 31, 2019 follows:
 
Operating Leases
 
Finance Leases
2019
$
108

 
$
3

2020
115

 
5

2021
85

 
4

2022
54

 
3

2023
35

 
3

Thereafter
84

 
1

Total lease payments
$
481

 
$
19

Less imputed interest
49

 
3

Total present value of lease liabilities
$
432

 
$
16


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A summary of minimum rental commitments at December 31, 2018 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate, follow:
 
Operating Leases
2019
$
165

2020
133

2021
106

2022
75

2023
53

Thereafter
110

Total lease commitments
$
642


Note 7.    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 March 31
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Service cost
$
23

 
$
25

 
$
14

 
$
16

 
$

 
$
1

Interest cost
34

 
30

 
15

 
14

 
3

 
3

Expected return on plan assets
(58
)
 
(63
)
 
(27
)
 
(27
)
 

 
(1
)
Amortization
15

 
24

 
10

 
10

 
(3
)
 
(3
)
 
14

 
16

 
12

 
13

 

 

Settlements
10

 
14

 

 

 

 

Total expense
$
24

 
$
30

 
$
12

 
$
13

 
$

 
$


The components of retirement benefits expense other than service costs are included in Other income - net.


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Note 8.
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 opined, among other things, that the value contributed to the Trust for a release of the guaranty was below reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities could result in plaintiffs suing Pepsi under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts opined that Pepsi had no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations under the guaranty. The arbitration proceedings closed in December 2017. On July 11, 2018, the arbitration panel made certain findings and concluded that the value contributed to the Trust 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 argued that an additional $347 should be contributed. Cooper and its expert disagreed with Pepsi’s argument and believed that Pepsi’s recalculation was flawed and failed to comply with the instructions of the panel. On August 23, 2018, the panel issued its final award and ordered Cooper to pay $293 to Pneumo Abex. On August 30, 2018, Pepsi sought to confirm the award in Texas state court, which Cooper opposed on October 9, 2018. Cooper further requested that the court vacate the award on various grounds, including that Cooper was prejudiced by the conduct of the proceedings, the panel exceeded its powers, and because the panel denied Cooper a full and fair opportunity to present certain evidence. The court confirmed the award at the confirmation hearing, which was held on October 12, 2018. On November 2, 2018, the Company appealed. On November 28, 2018, the Company paid $297, the full judgment plus accrued post-judgment interest, to Pneumo Abex and preserved its rights, including to appeal. On April 25, 2019, the appeal that Cooper filed was dismissed.

Note 9.
INCOME TAXES

The effective income tax rate for the first quarter of 2019 was expense of 13.5% compared to expense of 13.8% for the first quarter of 2018.

As the Company has previously disclosed, Eaton's United States subsidiaries ("Eaton US") received a Notice in 2014 from the Internal Revenue Service ("IRS") for tax years 2007 through 2010 which included proposed assessments involving two issues: the recognition of income for several of Eaton US's controlled foreign corporations, and transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the 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 transfer pricing issue included in the Notice 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 open tax years have been resolved.

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Note 10. EQUITY
On February 24, 2016, the Board of Directors adopted a share repurchase program for share repurchases up to $2,500 of ordinary shares (2016 Program). During the first quarter of 2018, 3.7 million ordinary shares were repurchased under the 2016 Program in the open market at a total cost of $300. 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 2019 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 first quarter of 2019, 1.9 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $150.
The changes in Shareholders’ equity follow:
 
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

 
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

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
53

 
(7
)
 
(5
)
 
41

Amounts reclassified from Accumulated other
   comprehensive loss

 
28

 
(2
)
 
26

Net current-period Other comprehensive
   (loss) income
53

 
21

 
(7
)
 
67

Balance at March 31, 2019
$
(2,811
)
 
$
(1,257
)
 
$
(10
)
 
$
(4,078
)

14

Table of Contents

The reclassifications out of Accumulated other comprehensive loss follow:
 
Three months ended March 31, 2019
 
Consolidated statements
of income classification
Amortization of defined benefit pensions and other postretirement benefits items
 
 
 
Actuarial loss and prior service cost
$
(32
)
1 
 
Tax benefit
4

 
 
Total, net of tax
(28
)
 
 
 
 
 
 
Gains and (losses) on cash flow hedges
 
 
 
Currency exchange contracts
2

 
Cost of products sold
Tax expense

 
 
Total, net of tax
2

 
 
 
 
 
 
Total reclassifications for the period
$
(26
)
 
 
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 7 for additional information about 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
March 31
(Shares in millions)
2019
 
2018
Net income attributable to Eaton ordinary shareholders
$
522

 
$
488

 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
425.9

 
441.7

Less dilutive effect of equity-based compensation
1.9

 
2.9

Weighted-average number of ordinary shares outstanding - basic
424.0

 
438.8

 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
Diluted
$
1.23

 
$
1.10

Basic
1.23

 
1.11

For the first quarter of 2019 and 2018, 1.6 million and 0.1 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.


15

Table of Contents

Note 11.
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
March 31, 2019
 
 
 
 
 
 
 
Cash
$
303

 
$
303

 
$

 
$

Short-term investments
143

 
143

 

 

Net derivative contracts
17

 

 
17

 

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Cash
$
283

 
$
283

 
$

 
$

Short-term investments
157

 
157

 

 

Net derivative contracts
14

 

 
14

 

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 $6,824 and fair value of $7,024 at March 31, 2019 compared to $7,107 and $7,061, respectively, at December 31, 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.


16

Table of Contents

Note 12.
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, commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income 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 gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income 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 is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Condensed Consolidated Statements of Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.
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 instrument had a carrying value on a pre-tax basis of $612 at March 31, 2019 and $623 at December 31, 2018.

17

Table of Contents

Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets follows:
 
Notional
amount
 
Other
 current
assets
 
Other
noncurrent
assets
 
Other
current
liabilities
 
Other
noncurrent
liabilities
 
Type of
hedge
 
Term
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate
 swaps
$
2,250

 
$

 
$
32

 
$

 
$
14

 
Fair value
 
3 months to 16 years
Forward starting floating-to-fixed
 interest rate swaps
300

 

 

 

 
12

 
Cash flow
 
34 years
Currency exchange contracts
1,000

 
14

 
1

 
9

 
6

 
Cash flow
 
1 to 36 months
Commodity contracts
16

 
2

 

 

 

 
Cash flow
 
1 to 9 months
Total
 
 
$
16

 
$
33

 
$
9

 
$
32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,165

 
$
18

 
 
 
$
9

 
 
 
 
 
1 to 12 months
Commodity contracts
9

 

 
 
 

 
 
 
 
 
1 month
Total
 
 
$
18

 


 
$
9

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 


 
 
 
 
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect 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. For the three months ended March 31, 2019, $51 of cash inflow resulting from the settlement of these derivatives has been classified in investing activities on the Condensed Consolidated Statement of Cash Flows. The net cash flow from the settlement of these derivatives has been presented in operating activities in prior periods and have not been restated as such amounts are not material.

18

Table of Contents

As of March 31, 2019, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
 
 
March 31, 2019
 
 
Commodity
 
(millions of pounds)
 
Term
Copper
 
6

 
1 to 9 months
The following amounts were recorded on the consolidated balance sheet 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 Sheet
March 31, 2019
 
March 31, 2019
Long-term debt
$
(2,863
)
 
$
(60
)
(a) At March 31, 2019, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $42.
The impact of hedging activities to the Consolidated Statement of Income are as follow:
 
Three months ended March 31, 2019
 
Net Sales
 
Cost of products sold
 
Interest expense - net
Amounts from Consolidated Statement of Income
$
5,305

 
$
3,573

 
$
66

 
 
 
 
 
 
Gain (loss) on derivatives designated as cash flow hedges
 
 
 
 
 
Currency exchange contracts
 
 
 
 
 
Hedged item
$
3

 
$
(5
)
 
$

Derivative designated as hedging instrument
(3
)
 
5

 

 
 
 
 
 
 
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
$

 
$

 
$
(23
)
Derivative designated as hedging instrument

 

 
23


19

Table of Contents

The impact of derivatives not designated as hedges to the Consolidated Statement of Income are as follow:
 
Gain (loss) recognized in Consolidated Statement of Income
 
Consolidated Statement of Income classification
 
Three months ended
March 31
 
 
 
2019
 
 
Gain (loss) on derivatives not designated as hedges
 
 
 
Currency exchange contracts
$
40

 
Other income - net
Commodity Contracts
1

 
Cost of products sold
Total
$
41

 
 
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statement 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
March 31
 
 
 
Three months ended
March 31
 
2019
 
2018
 
 
 
2019
 
2018
Derivatives designated as cash
flow hedges
 
 
 
 
 
 
 
 
 
Forward starting floating-to-fixed
interest rate swaps
$
(9
)
 
$

 
Interest expense - net
 
$

 
$

Currency exchange contracts

 
13

 
Cost of products sold
 
2

 
(4
)
Commodity contracts
2

 

 
Cost of products sold
 

 

Non-derivative designated as net
   investment hedges
 
 
 
 
 
 
 
 
 
Foreign currency denominated debt
12

 
(24
)
 
Other income - net
 

 

Total
$
5


$
(11
)



$
2


$
(4
)
At March 31, 2019 and March 31, 2018, a gain of $7 and a loss of $6, 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.

Note 13.    INVENTORY
Inventory is carried at lower of cost or net realizable value. The components of inventory follow:
 
March 31,
2019
 
December 31,
2018
Raw materials
$
1,120

 
$
1,077

Work-in-process
549

 
500

Finished goods
1,228

 
1,208

Total inventory
$
2,897

 
$
2,785



20

Table of Contents

Note 14.
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 eMobility. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton’s business segments, see Note 16 to the Consolidated Financial Statements contained in the 2018 Form 10-K.
 
Three months ended
March 31
 
2019
 
2018
Net sales
 
 
 
Electrical Products
$
1,760

 
$
1,732

Electrical Systems and Services
1,464

 
1,381

Hydraulics
686

 
710

Aerospace
502

 
458

Vehicle
810

 
893

eMobility
83

 
77

Total net sales
$
5,305

 
$
5,251

 
 
 
 
Segment operating profit
 
 
 
Electrical Products
$
331

 
$
307

Electrical Systems and Services
192

 
167

Hydraulics
80

 
90

Aerospace
116

 
89

Vehicle
122

 
132

eMobility
5

 
11

Total segment operating profit
846

 
796

 
 
 
 
Corporate
 
 
 
Amortization of intangible assets
(93
)
 
(98
)
Interest expense - net
(66
)
 
(70
)
Pension and other postretirement benefits expense

 
(2
)
Other corporate expense - net
(84
)
 
(61
)
Income before income taxes
603

 
565

Income tax expense
81

 
78

Net income
522

 
487

Less net loss for noncontrolling interests

 
1

Net income attributable to Eaton ordinary shareholders
$
522

 
$
488


21


Note 15.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Registered Senior Notes issued by Eaton Corporation are registered under the Securities Act of 1933. Eaton and certain 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 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. These restructurings have been reflected as of the beginning of the earliest period presented below.


22


 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2019
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,758

 
$
1,820

 
$
3,038

 
$
(1,311
)
 
$
5,305

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,390

 
1,289

 
2,195

 
(1,301
)
 
3,573

Selling and administrative expense
4

 
361

 
205

 
347

 

 
917

Research and development expense

 
41

 
38

 
77

 

 
156

Interest expense (income) - net

 
70

 
4

 
(7
)
 
(1
)
 
66

Other expense (income) - net
(12
)
 
(8
)
 
(8
)
 
18

 

 
(10
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(527
)
 
(306
)
 
(831
)
 
(735
)
 
2,399

 

Intercompany expense (income) - net
13

 
(36
)
 
447

 
(424
)
 

 

Income (loss) before income taxes
522

 
246


676


1,567


(2,408
)

603

Income tax expense (benefit)

 
9

 
(12
)
 
86

 
(2
)
 
81

Net income (loss)
522

 
237


688


1,481


(2,406
)

522

Less net loss (income) for
   noncontrolling interests

 

 

 

 

 

Net income (loss) attributable to
   Eaton ordinary shareholders
$
522

 
$
237


$
688


$
1,481


$
(2,406
)

$
522

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
67

 
$
(6
)
 
$
72

 
$
91

 
$
(157
)
 
$
67

Total comprehensive income
  (loss) attributable to Eaton
  ordinary shareholders
$
589

 
$
231

 
$
760

 
$
1,572

 
$
(2,563
)
 
$
589

 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2018
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,689

 
$
1,700

 
$
3,191

 
$
(1,329
)
 
$
5,251

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,352

 
1,236

 
2,310

 
(1,325
)
 
3,573

Selling and administrative expense
3

 
341

 
178

 
367

 

 
889

Research and development expense

 
39

 
41

 
76

 

 
156

Interest expense (income) - net

 
68

 
4

 
(1
)
 
(1
)
 
70

Other expense (income) - net
18

 
5

 
(9
)
 
(16
)
 

 
(2
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(514
)
 
(248
)
 
(797
)
 
(641
)
 
2,200

 

Intercompany expense (income) - net
5

 
(22
)
 
487

 
(470
)
 

 

Income (loss) before income taxes
488

 
154


560


1,566


(2,203
)

565

Income tax expense (benefit)

 
(6
)
 
(14
)
 
99

 
(1
)
 
78

Net income (loss)
488

 
160


574


1,467


(2,202
)

487

Less net loss (income) for
   noncontrolling interests

 

 

 
1

 

 
1

Net income (loss) attributable to
   Eaton ordinary shareholders
$
488

 
$
160


$
574


$
1,468


$
(2,202
)

$
488

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
296

 
$
10

 
$
284

 
$
609

 
$
(903
)
 
$
296

Total comprehensive income
   (loss) attributable to Eaton
   ordinary shareholders
$
784

 
$
170

 
$
858

 
$
2,077

 
$
(3,105
)
 
$
784




23


CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2019
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$
2

 
$
18

 
$
11

 
$
272

 
$

 
$
303

Short-term investments

 

 

 
143

 

 
143

Accounts receivable - net

 
492

 
1,381

 
1,992

 

 
3,865

Intercompany accounts
   receivable
16

 
1,452

 
1,809

 
2,141

 
(5,418
)
 

Inventory

 
559

 
850

 
1,574

 
(86
)
 
2,897

Prepaid expenses and
   other current assets

 
116

 
26

 
377

 
17

 
536

Total current assets
18

 
2,637


4,077


6,499

 
(5,487
)
 
7,744

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net

 
850

 
673

 
1,950

 

 
3,473

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill

 
1,330

 
6,705

 
5,283

 

 
13,318

Other intangible assets

 
126

 
3,016

 
1,612

 

 
4,754

Operating lease assets

 
139

 
49

 
232

 

 
420

Deferred income taxes

 
318

 

 
302

 
(311
)
 
309

Investment in subsidiaries
17,045

 
8,012

 
72,214

 
26,299

 
(123,570
)
 

Intercompany loans receivable
1,009

 
6,417

 
7,241

 
59,957

 
(74,624
)
 

Other assets

 
755

 
155

 
721

 

 
1,631

Total assets
$
18,072

 
$
20,584

 
$
94,130

 
$
102,855

 
$
(203,992
)
 
$
31,649

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and
   shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Short-term debt
$

 
$
730

 
$

 
$
11

 
$

 
$
741

Current portion of
   long-term debt

 
41

 

 
1

 

 
42

Accounts payable

 
514

 
460

 
1,300

 

 
2,274

Intercompany accounts payable
25

 
1,216

 
2,460

 
1,717

 
(5,418
)
 

Accrued compensation

 
48

 
32

 
222

 

 
302

Other current liabilities
8

 
597

 
258

 
1,065

 
(1
)
 
1,927

Total current liabilities
33

 
3,146

 
3,210

 
4,316

 
(5,419
)
 
5,286

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
5,842

 
933

 
6

 
1

 
6,782

Pension liabilities

 
381

 
129

 
755

 

 
1,265

Other postretirement
   benefits liabilities

 
165

 
82

 
73

 

 
320

Operating lease liabilities

 
100

 
37

 
171

 

 
308

Deferred income taxes

 

 
506

 
165

 
(311
)
 
360

Intercompany loans payable
1,806

 
5,791

 
66,260

 
767

 
(74,624
)
 

Other noncurrent liabilities

 
395

 
289

 
377

 

 
1,061

Total noncurrent liabilities
1,806

 
12,674


68,236


2,314


(74,934
)

10,096

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
16,233

 
4,764

 
22,684

 
96,191

 
(123,639
)
 
16,233

Noncontrolling interests

 

 

 
34

 

 
34

Total equity
16,233

 
4,764

 
22,684

 
96,225

 
(123,639
)
 
16,267

Total liabilities and equity
$
18,072

 
$
20,584


$
94,130


$
102,855


$
(203,992
)

$
31,649


24


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

 
7,658

 
71,334

 
25,551

 
(121,019
)
 

Intercompany loans receivable
1,508

 
5,843

 
8,406

 
59,147

 
(74,904
)
 

Other assets

 
746

 
117

 
705

 

 
1,568

Total assets
$
17,985

 
$
19,614

 
$
94,343

 
$
101,864

 
$
(202,714
)
 
$
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

 
496

 
416

 
1,218

 

 
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

 
3,009

 
3,952

 
4,527

 
(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

 
4,670

 
21,927

 
94,484

 
(121,081
)
 
16,107

Noncontrolling interests

 

 

 
35

 

 
35

Total equity
16,107

 
4,670

 
21,927

 
94,519

 
(121,081
)
 
16,142

Total liabilities and equity
$
17,985

 
$
19,614


$
94,343


$
101,864


$
(202,714
)

$
31,092


25


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2019
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
(36
)
 
$
(19
)
 
$
202

 
$
404

 
$

 
$
551

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(27
)
 
(28
)
 
(94
)
 

 
(149
)
Sales (purchases) of short-term
investments - net

 

 

 
16

 

 
16

Loans to affiliates

 
(185
)
 

 
(1,665
)
 
1,850

 

Repayments of loans from affiliates

 
272

 

 
1,416

 
(1,688
)
 

Proceeds (payments) for settlement of currency exchange contracts not designated as hedges - net

 
(2
)
 

 
53

 

 
51

Other - net

 
(5
)
 
24

 
(5
)
 

 
14

Net cash provided by (used in) investing activities

 
53


(4
)

(279
)

162


(68
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 
342

 

 

 

 
342

Payments on borrowings

 
(301
)
 

 
(14
)
 

 
(315
)
Proceeds from borrowings from
   affiliates
499

 
1,133

 
33

 
185

 
(1,850
)
 

Payments on borrowings from
   affiliates

 
(1,386
)
 
(30
)
 
(272
)
 
1,688

 

Other intercompany financing
   activities

 
204

 
(184
)
 
(20
)
 

 

Cash dividends paid
(302
)
 

 

 

 

 
(302
)
Exercise of employee stock options
20

 

 

 

 

 
20

Repurchase of shares
(180
)
 

 

 

 

 
(180
)
Employee taxes paid from shares withheld

 
(29
)
 
(6
)
 

 

 
(35
)
Other - net

 

 

 
(1
)
 

 
(1
)
Net cash provided by (used in)
   financing activities
37

 
(37
)

(187
)

(122
)

(162
)

(471
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
8

 

 
8

Total increase (decrease) in cash
1

 
(3
)

11


11




20

Cash at the beginning of the period
1

 
21

 

 
261

 

 
283

Cash at the end of the period
$
2

 
$
18


$
11


$
272


$


$
303


26


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
2

 
$
(49
)
 
$
82

 
$
304

 
$

 
$
339

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(23
)
 
(24
)
 
(84
)
 

 
(131
)
Sales (purchases) of short-term
investments - net

 

 

 
31

 

 
31

Investments in affiliates

 
(36
)
 

 

 
36

 

Loans to affiliates

 

 
(486
)
 
(1,177
)
 
1,663

 

Repayments of loans from affiliates

 
16

 
886

 
1,299

 
(2,201
)
 

Other - net

 
(15
)
 
(4
)
 
(18
)
 

 
(37
)
Net cash provided by (used in)
   investing activities

 
(58
)

372


51


(502
)

(137
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 
90

 

 
89

 

 
179

Payments on borrowings

 

 
(33
)
 

 

 
(33
)
Proceeds from borrowings from
   affiliates
585

 
1,050

 
28

 

 
(1,663
)
 

Payments on borrowings from
   affiliates
(22
)
 
(1,409
)
 
(16
)
 
(754
)
 
2,201

 

Capital contributions from affiliates

 

 

 
36

 
(36
)
 

Other intercompany financing activities

 
220

 
(441
)
 
221

 

 

Cash dividends paid
(284
)
 

 

 

 

 
(284
)
Exercise of employee stock options
19

 

 

 

 

 
19

Repurchase of shares
(300
)
 

 

 

 

 
(300
)
Employee taxes paid from shares withheld

 
(16
)
 
(4
)
 
(3
)
 

 
(23
)
Other - net

 
(1
)
 

 

 

 
(1
)
Net cash provided by (used in)
   financing activities
(2
)
 
(66
)

(466
)

(411
)

502


(443
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(3
)
 

 
(3
)
Total increase (decrease) in cash

 
(173
)

(12
)

(59
)



(244
)
Cash at the beginning of the period

 
183

 
18

 
360

 

 
561

Cash at the end of the period
$

 
$
10


$
6


$
301


$


$
317



27

Table of Contents

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 2018 net sales of $21.6 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic, and mechanical power more reliably, safely, and sustainably. Eaton has approximately 99,000 employees in over 59 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
March 31
 
2019
 
2018
Net sales
$
5,305

 
$
5,251

Net income attributable to Eaton ordinary shareholders
522

 
488

Net income per share attributable to Eaton ordinary shareholders - diluted
$
1.23

 
$
1.10

On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., 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.
On March 1, 2019, the Company announced it plans to pursue a tax-free spin-off of its Lighting business. The spin-off will create an independent, publicly traded company and is expected to be completed by the end of 2019.



28

Table of Contents

RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include adjusted earnings, adjusted earnings per ordinary share, and operating profit before acquisition integration 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 adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the table below. Operating profit before acquisition integration 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 the planned spin-off of the Lighting business. 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
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
5,305

 
$
5,251

 
1
%
Gross profit
1,732

 
1,678

 
3
%
Percent of net sales
32.6
%
 
32.0
%
 
 
Income before income taxes
603

 
565

 
7
%
Net income
522

 
487

 
7
%
Less net loss for noncontrolling interests

 
1

 
 
Net income attributable to Eaton
   ordinary shareholders
522

 
488

 
7
%
Excluding acquisition integration and divestiture charges,
  after-tax (Note 3)
11

 

 
 
Adjusted earnings
$
533

 
$
488

 
9
%
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary shareholders - diluted
$
1.23

 
$
1.10

 
12
%
Excluding per share impact of acquisition
   integration and divestiture charges, after-tax (Note 3)
0.03

 

 
 
Adjusted earnings per ordinary share
$
1.26

 
$
1.10

 
15
%
Net Sales
Net sales increased 1% in the first quarter of 2019 compared to the first quarter of 2018 due to an increase of 4% in organic sales, partially offset by a decrease of 3% from the impact of negative currency translation. The increase in organic sales in the first quarter of 2019 was primarily due to higher sales volumes in all business segments, except for Vehicle.
Gross Profit
Gross profit margin increased from 32.0% in the first quarter of 2018 to 32.6% in the first quarter of 2019. The increase in gross profit margin was primarily due to higher sales volumes, other operating improvements in Electrical Products and favorable product mix in the Aerospace business segment.
Income Taxes
The effective income tax rate for the first quarter of 2019 was expense of 13.5%, a slight decrease compared to expense of 13.8% for the first quarter of 2018.

29

Table of Contents

Net Income
Net income attributable to Eaton ordinary shareholders of $522 in the first quarter of 2019 increased 7% compared to Net income attributable to Eaton ordinary shareholders of $488 in the first quarter of 2018. The increase in the first quarter of 2019 was primarily due to higher sales volumes and favorable product mix.
Net income per ordinary share increased to $1.23 in the first quarter of 2019 compared to $1.10 in the first quarter of 2018. The increase in the Net income per ordinary share in the first quarter of 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.
Adjusted Earnings
Adjusted earnings of $533 in the first quarter of 2019 increased 9% compared to Adjusted earnings of $488 in the first quarter of 2018. The increase in Adjusted earnings in the first quarter of 2019 was primarily due to higher Net income attributable to Eaton ordinary shareholders and higher acquisition integration and divestiture charges.
Adjusted earnings per ordinary share increased to $1.26 in the first quarter of 2019 compared to $1.10 in the first quarter of 2018. The increase in Adjusted earnings per ordinary share in the first quarter of 2019 was due to higher Adjusted earnings, higher acquisition integration and divestiture charges 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
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
1,760

 
$
1,732

 
2
%
 
 
 
 
 
 
Operating profit
$
331

 
$
307

 
8
%
Operating margin
18.8
%
 
17.7
%
 
 
 
 
 
 
 
 
Acquisition integration and divestiture charges
$
1

 
$

 
 
 
 
 
 
 
 
Before acquisition integration and divestiture charges
 
 
 
 
 
Operating profit
$
332

 
$
307

 
8
%
Operating margin
18.9
%
 
17.7
%
 
 
Net sales increased 2% in the first quarter of 2019 compared to the first quarter of 2018 due to an increase of 5% in organic sales, partially offset by a decrease of 3% from the impact of negative currency translation. Organic sales grew in the first quarter of 2019 in North America, primarily driven by strong growth in commercial and residential markets.
The operating margin increased from 17.7% in the first quarter of 2018 to 18.8% in the first quarter of 2019 due to higher sales volumes and other operating improvements.
The operating margin before acquisition integration and divestiture charges increased from 17.7% in the first quarter of 2018 to 18.9% in the first quarter of 2019 primarily due to an increase in the operating margin, and higher acquisition and divestiture transaction charges.

30

Table of Contents

Electrical Systems and Services
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
1,464

 
$
1,381

 
6
%
 
 
 
 
 
 
Operating profit
$
192

 
$
167

 
15
%
Operating margin
13.1
%
 
12.1
%
 
 
Net sales increased 6% in the first quarter of 2019 compared to the first quarter of 2018 due to an increase of 8% in organic sales, partially offset by a decrease of 2% from the impact of negative currency translation. The increase in organic sales in the first quarter of 2019 was primarily due to strength in commercial construction markets and data centers.
The operating margin increased from 12.1% in the first quarter of 2018 to 13.1% in the first quarter of 2019 primarily due to higher sales volumes.
Hydraulics
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
686

 
$
710

 
(3
)%
 
 
 
 
 
 
Operating profit
$
80

 
$
90

 
(11
)%
Operating margin
11.7
%
 
12.7
%
 
 
Net sales decreased 3% in the first quarter of 2019 compared to the first quarter of 2018 due to a decrease of 4% from the impact of negative currency translation, partially offset by an increase of 1% in organic sales. The increase in organic sales in the first quarter of 2019 was due to growth in construction equipment markets, partially offset by declines in agricultural and industrial equipment markets.
The operating margin decreased from 12.7% in the first quarter of 2018 to 11.7% in the first quarter of 2019 primarily due to unfavorable product mix.
Aerospace
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
502

 
$
458

 
10
%
 
 
 
 
 
 
Operating profit
$
116

 
$
89

 
30
%
Operating margin
23.1
%
 
19.4
%
 
 
Net sales increased 10% in the first quarter of 2019 compared to the first quarter of 2018 due to an increase of 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 first quarter of 2019 was primarily due to higher sales in commercial markets.
The operating margin increased from 19.4% in the first quarter of 2018 to 23.1% in first quarter of 2019 primarily due to higher sales volumes and favorable product mix.

31

Table of Contents

Vehicle
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
810

 
$
893

 
(9
)%
 
 
 
 
 
 
Operating profit
$
122

 
$
132

 
(8
)%
Operating margin
15.1
%
 
14.8
%
 
 
Net sales decreased 9% in the first quarter of 2019 compared to the first quarter of 2018 due to a decrease of 6% in organic sales and a decrease of 3% from the impact of negative currency translation. The decrease in organic sales in the first quarter of 2019 was driven by weakness in global light vehicle markets and revenues transferring over to the Eaton Cummins Automated Transmission Technologies joint venture.
The operating margin increased from 14.8% in the first quarter of 2018 to 15.1% in the first quarter of 2019 primarily due to lower restructuring costs, and other cost control measures, partially offset by lower sales volumes.
eMobility
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Net sales
$
83

 
$
77

 
8
 %
 
 
 
 
 
 
Operating profit
$
5

 
$
11

 
(55
)%
Operating margin
6.0
%
 
14.3
%
 
 
Net sales increased 8% in the first quarter of 2019 compared to the first quarter of 2018 due to an increase of 9% in organic sales, partially offset by a decrease of 1% from the impact of negative currency translation. The increase in organic sales in the first quarter of 2019 was due to strength in North America.
The operating margin decreased from 14.3% in the first quarter of 2018 to 6.0% in the first quarter of 2019 primarily due to increased research and development costs.
Corporate Expense
 
Three months ended
March 31
 
Increase (decrease)
 
2019
 
2018
 
Amortization of intangible assets
$
93

 
$
98

 
(5
)%
Interest expense - net
66

 
70

 
(6
)%
Pension and other postretirement
   benefits expense

 
2

 
(100
)%
Other corporate expense - net
84

 
61

 
38
 %
Total corporate expense
$
243

 
$
231

 
5
 %
Total corporate expense was $243 in the first quarter of 2019 compared to corporate expense of $231 in the first quarter of 2018. The change in Total corporate expense for the first quarter of 2019 was primarily due to costs related to the planned spin-off of the Lighting business discussed in Note 2.


32

Table of Contents

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 March 31, 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.
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 $551 in the first three months of 2019, an increase of $212 in the source of cash compared to $339 in the first three months of 2018. The increase in net cash provided by operating activities in the first three months of 2019 was driven by lower working capital balances compared to 2018.
Investing Cash Flow
Net cash used in investing activities was $68 in the first three months of 2019, a decrease in the use of cash of $69 compared to $137 in the first three months of 2018. The decrease in the use of cash was primarily driven by $51 of proceeds in 2019 from the settlement of currency exchange contracts not designated as hedges discussed in Note 12.
Financing Cash Flow
Net cash used in financing activities was $471 in the first three months of 2019, an increase of $28 in the use of cash compared to $443 in the first three months of 2018. The increase in the use of cash was primarily due to higher payments on borrowings of $315 in 2019 compared to $33 in 2018 and higher dividends paid of $302 in 2019 compared to $284 in 2018, partially offset by higher proceeds from borrowings of $342 in 2019 compared to $179 in 2018 and lower share repurchases of $180 in 2019 compared to $300 in 2018.

FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning 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: 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.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in exposures to market risk since December 31, 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 March 31, 2019.
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 first quarter of 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.


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PART II — OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 8 of the Notes to the Condensed Consolidated Financial Statements.

ITEM 1A.
RISK FACTORS.
“Item 1A. Risk Factors” in Eaton's 2018 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 2018 Form 10-K.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
During the first quarter of 2019, 1.9 million ordinary shares were repurchased in the open market at a total cost of $150 million. These shares were repurchased under the program approved by the Board on February 27, 2019 (the 2019 Program). A summary of the shares repurchased in the first quarter of 2019 follows:
Month
 
Total number
of shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased as
part of publicly
announced
plans or programs1
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)
January
 

 
$

 

 
$
4,702

February
 

 
$

 

 
$
4,702

March
 
1,873,270

 
$
80.09

 
1,873,270

 
$
4,552

Total
 
1,873,270

 
$
80.09

 
1,873,270

 
 
1 The 2019 Program was authorized for repurchases up to $5 billion and was announced in this report on Form 10-Q (See Note
10 to Item 1 of this report).

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ITEM 6.
EXHIBITS.
Eaton Corporation plc
First Quarter 2019 Report on Form 10-Q
3 (i)
 
 
 
 
3 (ii)
 
 
 
 
4.1
 
 
 
 
4.2
 
 
 
 
4.3
 
 
 
 
4.4
 
 
 
 
4.5
 
 
 
 
4.6
 
 
 
 
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 - 4.6) hereto
 
 
 
31.1
 
 
 
 
31.2
 
 
 
 
32.1
 
 
 
 
32.2
 
 
 
 
101.INS
 
XBRL Instance Document *
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document *
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document *
 
 
 
101.DEF
 
XBRL Taxonomy Extension Label Definition Document *
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document *
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document *
_______________________________
*
 
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended March 31, 2019 and 2018, (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018, (iii) Condensed Consolidated Balance Sheets at March 31, 2019 and December 31, 2018, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 and (v) Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2019.

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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.

 
 
 
EATON CORPORATION plc
 
 
 
 
Registrant
 
 
 
 
 
 
Date:
April 30, 2019
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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