10-Q
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 September 30, 2015
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
 
-
(Address of principal executive offices)
 
(Zip Code)
 
 
 
+1 353 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
 
 
 
 
(Do not check if a smaller reporting company)
 
 
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 462.8 million Ordinary Shares outstanding as of September 30, 2015.
 



Table of Contents

TABLE OF CONTENTS
 
 
EX-12
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
EX-99.1 FRS 102 NOTIFICATION
 
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
 



Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS.

EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME

 
Three months ended
September 30
 
Nine months ended
September 30
(In millions except for per share data)
2015
 
2014
 
2015
 
2014
Net sales
$
5,203

 
$
5,728

 
$
15,798

 
$
16,987

 
 
 
 
 
 
 
 
Cost of products sold
3,597

 
3,916

 
10,865

 
11,799

Selling and administrative expense
907

 
961

 
2,723

 
2,907

Litigation settlements

 

 

 
644

Research and development expense
156

 
163

 
472

 
493

Interest expense - net
59

 
56

 
175

 
173

Other income - net
(3
)
 
(10
)
 
(27
)
 
(181
)
Income before income taxes
487

 
642

 
1,590

 
1,152

Income tax expense (benefit)
42

 
37

 
143

 
(66
)
Net income
445

 
605

 
1,447

 
1,218

Less net loss (income) for noncontrolling interests
1

 
(3
)
 

 
(6
)
Net income attributable to Eaton ordinary shareholders
$
446

 
$
602

 
$
1,447

 
$
1,212

 
 
 
 
 
 
 
 
Net income per ordinary share
 
 
 
 
 
 
 
Diluted
$
0.96

 
$
1.26

 
$
3.09

 
$
2.53

Basic
0.96

 
1.27

 
3.10

 
2.55

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
 
 
 
 
Diluted
466.4

 
477.2

 
468.5

 
478.2

Basic
465.1

 
474.8

 
466.8

 
475.5

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.55

 
$
0.49

 
$
1.65

 
$
1.47


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

2

Table of Contents

EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three months ended
September 30
 
Nine months ended
September 30
(In millions)
2015
 
2014
 
2015
 
2014
Net income
$
445

 
$
605

 
$
1,447

 
$
1,218

Less net loss (income) for noncontrolling interests
1

 
(3
)
 

 
(6
)
Net income attributable to Eaton ordinary shareholders
446

 
602

 
1,447

 
1,212

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
Currency translation and related hedging instruments
(372
)
 
(609
)
 
(883
)
 
(598
)
Pensions and other postretirement benefits
60

 
45

 
164

 
118

Cash flow hedges

 
(3
)
 
3

 
(1
)
Other comprehensive loss attributable to Eaton
   ordinary shareholders
(312
)
 
(567
)
 
(716
)
 
(481
)
 


 


 


 


Total comprehensive income attributable to Eaton
  ordinary shareholders
$
134

 
$
35

 
$
731

 
$
731


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


3

Table of Contents

EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
September 30,
2015
 
December 31,
2014
Assets
 
 
 
Current assets
 
 
 
Cash
$
418

 
$
781

Short-term investments
150

 
245

Accounts receivable - net
3,656

 
3,667

Inventory
2,395

 
2,428

Deferred income taxes
550

 
593

Prepaid expenses and other current assets
410

 
386

Total current assets
7,579

 
8,100

 
 
 
 
Property, plant and equipment - net
3,590

 
3,750

 
 
 
 
Other noncurrent assets
 
 
 
Goodwill
13,540

 
13,893

Other intangible assets
6,139

 
6,556

Deferred income taxes
246

 
228

Other assets
1,107

 
1,002

Total assets
$
32,201

 
$
33,529

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
1

 
$
2

Current portion of long-term debt
841

 
1,008

Accounts payable
1,997

 
1,940

Accrued compensation
373

 
420

Other current liabilities
1,888

 
1,985

Total current liabilities
5,100

 
5,355

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
7,830

 
8,024

Pension liabilities
1,539

 
1,812

Other postretirement benefits liabilities
502

 
513

Deferred income taxes
820

 
901

Other noncurrent liabilities
997

 
1,085

Total noncurrent liabilities
11,688

 
12,335

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
15,366

 
15,786

Noncontrolling interests
47

 
53

Total equity
15,413

 
15,839

Total liabilities and equity
$
32,201

 
$
33,529


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

4

Table of Contents

EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Nine months ended
September 30
(In millions)
2015
 
2014
Operating activities
 
 
 
Net income
$
1,447

 
$
1,218

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
692

 
743

Deferred income taxes
(101
)
 
(286
)
Pension and other postretirement benefits expense
244

 
260

Contributions to pension plans
(290
)
 
(333
)
Contributions to other postretirement benefits plans
(24
)
 
(38
)
Excess tax benefit from equity-based compensation

 
(20
)
Gain on sale of businesses

 
(68
)
Changes in working capital
(184
)
 
(391
)
Other - net
(155
)
 
(151
)
Net cash provided by operating activities
1,629

 
934

 
 
 
 
Investing activities
 

 
 
Cash paid for acquisitions of businesses, net of cash acquired
(38
)
 

Capital expenditures for property, plant and equipment
(368
)
 
(378
)
Sales of short-term investments - net
76

 
445

Proceeds from sale of businesses
1

 
282

Other - net
(44
)
 
(56
)
Net cash (used in) provided by investing activities
(373
)
 
293

 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
1

 

Payments on borrowings
(405
)
 
(580
)
Cash dividends paid
(771
)
 
(700
)
Exercise of employee stock options
48

 
50

Repurchase of shares
(454
)
 
(267
)
Excess tax benefit from equity-based compensation

 
20

Other - net
(8
)
 
(3
)
Net cash used in financing activities
(1,589
)
 
(1,480
)
 
 
 
 
Effect of currency on cash
(30
)
 
(7
)
Total decrease in cash
(363
)
 
(260
)
Cash at the beginning of the period
781

 
915

Cash at the end of the period
$
418

 
$
655


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

5

Table of Contents

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 2014 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.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 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 permit early adoption as of the original effective date. Eaton is evaluating the impact of ASU 2014-09 and an estimate of the impact to the consolidated financial statements cannot be made at this time.

Note 2.
ACQUISITION AND SALE OF BUSINESSES
Acquisition of Ephesus Lighting, Inc.
On October 28, 2015, Eaton acquired Ephesus Lighting, Inc. (Ephesus). Ephesus is a leader in LED lighting for stadiums and other high lumen outdoor and industrial applications. Its sales over the last twelve months were $22. Ephesus will be reported within the Electrical Products business segment.
Acquisition of UK Safety Technology Manufacturer Oxalis Group Ltd.
On January 12, 2015, Eaton acquired Oxalis Group Ltd. (Oxalis). Oxalis is a manufacturer of closed-circuit television camera stations, public address and general alarm systems and other electrical products for the hazardous area, marine and industrial communications markets. Oxalis is reported within the Electrical Systems and Services business segment.
Sale of Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions
On May 9, 2014, Eaton sold the Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions businesses to Safran for $270, which resulted in a pre-tax gain of $154.


6

Table of Contents

Note 3.
ACQUISITION INTEGRATION CHARGES
Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2015
 
2014
 
2015
 
2014
Business segment
 
 
 
 
 
 
 
Electrical Products
$
5

 
$
8

 
$
17

 
$
49

Electrical Systems and Services
3

 
4

 
10

 
43

Hydraulics

 
2

 
2

 
11

Total business segments
8

 
14

 
29

 
103

Corporate
2

 
5

 
4

 
19

Total acquisition integration charges before income taxes
$
10

 
$
19

 
$
33

 
$
122

Total after income taxes
$
7

 
$
14

 
$
22

 
$
81

Per ordinary share - diluted
$
0.01

 
$
0.03

 
$
0.05

 
$
0.17

Business segment acquisition integration charges for the three and nine months ended September 30, 2015 and 2014 were related primarily to the integration of Cooper Industries plc (Cooper) to gain efficiencies in selling, marketing, traditional back-office functions, manufacturing, and distribution. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments.
Corporate acquisition integration charges in 2015 and 2014 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information the charges were included in Other corporate expense - net.
The Cooper integration initiatives are expected to continue throughout 2015.

Note 4. RESTRUCTURING CHARGES
During the third quarter of 2015, Eaton took actions to reduce its cost structure in all business segments and at corporate. The restructuring charges were $113 in the third quarter of 2015. These restructuring activities are anticipated to be $10 in the fourth quarter of 2015 and $30 in 2016.
A summary of restructuring charges by segment follows:
 
 
Three months ended September 30, 2015
Electrical Products
 
11

Electrical Systems & Services
 
26

Hydraulics
 
25

Aerospace
 
5

Vehicle
 
29

Corporate
 
17

Total
 
113


7

Table of Contents

A summary of liabilities related to workforce reductions, plant closings and other associated costs follows:
 
 
Workforce reductions
 
Plant closing and other
 
Total
Balance at December 31, 2014
 

 

 

Liability recognized
 
99

 
14

 
113

Payments
 
(29
)
 
(1
)
 
(30
)
Other adjustments
 

 
(12
)
 
(12
)
Balance at September 30, 2015
 
70

 
1

 
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 13 for additional information about business segments.

Note 5. GOODWILL
A summary of goodwill follows:
 
 
Electrical
Products
 
Electrical
Systems and
Services
 
Hydraulics
 
Aerospace
 
Vehicle
 
Total
December 31, 2014
 
$
6,940

 
$
4,314

 
$
1,327

 
$
962

 
$
350

 
$
13,893

Additions
 

 
21

 

 

 

 
21

Reclassifications
 
(106
)
 
106

 

 

 

 

Translation
 
(170
)
 
(129
)
 
(65
)
 
(3
)
 
(7
)
 
(374
)
September 30, 2015
 
$
6,664

 
$
4,312

 
$
1,262

 
$
959

 
$
343

 
$
13,540


Note 6. 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
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
31

 
$
30

 
$
18

 
$
17

 
$
2

 
$
4

Interest cost
39

 
41

 
18

 
21

 
6

 
9

Expected return on plan assets
(65
)
 
(61
)
 
(25
)
 
(25
)
 
(2
)
 
(1
)
Amortization
29

 
23

 
10

 
7

 

 
1

 
34

 
33

 
21

 
20

 
6

 
13

Settlements
25

 
14

 

 

 

 

Total expense
$
59

 
$
47

 
$
21

 
$
20

 
$
6

 
$
13

 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
Nine months ended September 30
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
92

 
$
88

 
$
55

 
$
50

 
$
5

 
$
13

Interest cost
117

 
122

 
54

 
65

 
18

 
28

Expected return on plan assets
(196
)
 
(184
)
 
(75
)
 
(75
)
 
(4
)
 
(4
)
Amortization
89

 
69

 
30

 
21

 
1

 
5

 
102

 
95

 
64

 
61

 
20

 
42

Settlements
58

 
62

 

 

 

 

Total expense
$
160

 
$
157

 
$
64

 
$
61

 
$
20

 
$
42


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Note 7. 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. Historically, significant insurance coverage has been available to cover costs associated with these claims. 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 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. and Eaton Holding S.à.r.l. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At September 30, 2015, the Company has a total accrual of 91 Brazilian Reais related to this matter ($23 based on current exchange rates), comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($15 based on current exchange rates) with an additional 31 Brazilian Reais recognized through September 30, 2015 ($8 based on current exchange rates). In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton filed appeals on various issues to the Superior Court of Justice in Brasilia. In April 2013, the Superior Court of Justice ruled in favor of Raysul. Additional motions for clarification have been filed with the Superior Court of Justice in Brasilia and were denied. On February 2, 2015, a final appeal was filed with the Superior Court of Justice in Brasilia. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability.
On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court of Delaware. The action sought damages, which would have been trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. On June 23, 2014, Eaton announced it signed a settlement agreement with Meritor in the amount of $500 that resolved the lawsuit and removed the uncertainty of a trial and appeal process. On July 16, 2014, Eaton paid Meritor the $500.
Frisby Corporation, now known as Triumph Actuation Systems, LLC, and other claimants (collectively, Triumph) asserted claims alleging, among other things, unfair competition, defamation, malicious prosecution, deprivation of civil rights, and antitrust in the Hinds County Circuit Court of Mississippi in 2004 and in the Federal District Court of North Carolina in 2011. Eaton had asserted claims against Triumph regarding improper use of trade secrets and these claims were dismissed by the Hinds County Circuit Court. On June 18, 2014, Eaton announced it signed a settlement agreement with Triumph in the amount of $147.5 that resolved all claims and lawsuits and removed the uncertainty of a trial and appeal process. On July 8, 2014, Eaton paid Triumph the $147.5.

Note 8. INCOME TAXES
The effective income tax rate for the third quarter and first nine months of 2015 was an expense of 9%, compared to an expense of 6% and a benefit of 6% for the third quarter and first nine months of 2014, respectively. Excluding the litigation settlements and related legal costs as well as the gain on the sale of Eaton's Aerospace businesses, all of which represents a total pre-tax expense of $494 in the second quarter of 2014, the effective income tax rate for the first nine months of 2014 was an expense of 6%. See Note 7 and Note 2 for additional information about legal contingencies and the sale of businesses, respectively.
The increase in the effective tax rate in the third quarter and first nine months of 2015 is primarily due to more income earned in higher tax jurisdictions, including the United States.
At the end of the fourth quarter of 2011, the IRS issued a Notice for Eaton Corporation and Includible Subsidiaries 2005 and 2006 tax years (the 2011 Notice). The 2011 Notice proposed assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) the Company entered into with the IRS. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the 2011 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs, even though their respective APA terms had already expired.

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The Company is contesting the proposed assessments. The Company believes that it was in full compliance with the terms of the two APAs, and that the IRS's cancellation of these two APAs is without merit. On February 29, 2012, the Company filed a Petition with the U.S. Tax Court in which it asserted that the transfer pricing established in the APAs meets the arms-length standard set by the U.S. income tax laws, and accordingly, that the APAs should be enforced in accordance with their terms. The case involves both whether the APAs should be enforced and, if not, the appropriate transfer pricing methodology. The case was tried before the U.S. Tax Court in August and September 2015. The case will be fully submitted to the Court after the parties complete post-trial briefing on February 29, 2016, and it will likely be several months to a year before the Court renders a decision in the case.
During the third quarter of 2014, the Company received a Notice from the IRS for the 2007 through 2010 tax years (the 2014 Notice) proposing assessments of $190 in additional taxes plus $72 in penalties, net of agreed credits and deductions. The proposed assessments pertain primarily to the same transfer pricing issues that are currently in litigation for the 2011 Notice, as noted above. During 2007 through 2010, the Company set its transfer prices for products sold between these affiliates consistent with the terms of a written APA between it and the IRS that covered the years at issue. To establish the relevant transfer prices, the APA relied on prices at which the Company sells the products to third parties. The 2014 Notice includes a separate proposed assessment involving the recognition of income for several of the Company’s controlled foreign corporations. The Company believes that these proposed assessments are without merit. On November 25, 2014, the Company filed a Petition with the U.S. Tax Court in which it challenged the IRS's adjustments. The Company expects the outcome of the 2014 Notice on the transfer pricing matter to be determined by the judicial decision related to the 2011 Notice. The Company has continued to apply the arms-length transfer pricing methodology for 2011 through the current reporting period.

Note 9. EQUITY
Eaton has an ordinary share repurchase program (2013 Program) that authorizes the repurchase of 40 million ordinary shares. During the third quarter of 2015 and 2014, 4.8 million and 3.4 million ordinary shares were repurchased under the 2013 Program in the open market at a total cost of $284 and $225, respectively. During the first nine months of 2015 and 2014, 7.2 million and 4.8 million ordinary shares were repurchased under the 2013 Program in the open market at a total cost of $454 and $324, respectively.
The changes in Shareholders’ equity follow:
 
Eaton
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2014
$
15,786

 
$
53

 
$
15,839

Net income
1,447

 

 
1,447

Other comprehensive loss
(716
)
 

 
(716
)
Cash dividends paid
(771
)
 
(6
)
 
(777
)
Issuance of shares under equity-based compensation plans - net
77

 

 
77

Repurchase of shares
(454
)
 

 
(454
)
Change in Capital
(3
)
 

 
(3
)
Balance at September 30, 2015
$
15,366

 
$
47

 
$
15,413

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, 2014
$
(1,414
)
 
$
(1,485
)
 
$

 
$
(2,899
)
Other comprehensive (loss) income
    before reclassifications
(883
)
 
48

 
10

 
(825
)
Amounts reclassified from Accumulated other
   comprehensive loss

 
116

 
(7
)
 
109

Net current-period Other comprehensive
   (loss) income
(883
)
 
164

 
3

 
(716
)
Balance at September 30, 2015
$
(2,297
)
 
$
(1,321
)
 
$
3

 
$
(3,615
)

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Table of Contents

The reclassifications out of Accumulated other comprehensive loss follow:
 
Nine months ended September 30, 2015
 
Consolidated statements
of income classification
Amortization of pensions and other postretirement benefits items
 
 
 
Actuarial loss and prior service cost
$
(178
)
1 
 
Tax benefit
62

 
 
Total, net of tax
(116
)
 
 
 
 
 
 
Gains and (losses) on cash flow hedges
 
 
 
Currency exchange contracts
11

 
Cost of products sold
Tax expense
(4
)
 
 
Total, net of tax
7

 
 
 
 
 
 
Total reclassifications for the period
$
(109
)
 
 
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 6 for additional information about pension and other post retirement benefits items.

Net Income per Ordinary Share
A summary of the calculation of net income per ordinary share attributable to shareholders follows:
 
Three months ended
September 30
 
Nine months ended
September 30
(Shares in millions)
2015
 
2014
 
2015
 
2014
Net income attributable to Eaton ordinary shareholders
$
446

 
$
602

 
$
1,447

 
$
1,212

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
466.4

 
477.2

 
468.5

 
478.2

Less dilutive effect of equity-based compensation
1.3

 
2.4

 
1.7

 
2.7

Weighted-average number of ordinary shares outstanding - basic
465.1

 
474.8

 
466.8

 
475.5

 
 
 
 
 
 
 
 
Net income per ordinary share
 
 
 
 
 
 
 
Diluted
$
0.96

 
$
1.26

 
$
3.09

 
$
2.53

Basic
0.96

 
1.27

 
3.10

 
2.55

For the third quarter and first nine months of 2015, 1.8 million and 1.3 million stock options, respectively, were excluded from the calculation of diluted net income per ordinary share 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 2014, 0.5 million and 0.3 million stock options, respectively, were excluded from the calculation of diluted net income per ordinary share 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 10. 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.

11

Table of Contents

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, 2015
 
 
 
 
 
 
 
Cash
$
418

 
$
418

 
$

 
$

Short-term investments
150

 
150

 

 

Net derivative contracts
161

 

 
161

 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(136
)
 

 
(136
)
 

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Cash
$
781

 
$
781

 
$

 
$

Short-term investments
245

 
245

 

 

Net derivative contracts
70

 

 
70

 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(74
)
 

 
(74
)
 

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 $8,671 and fair value of $8,900 at September 30, 2015 compared to $9,032 and $9,509, respectively, at December 31, 2014. 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.

Note 11. 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 loss and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive loss and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.

12

Table of Contents

The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
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 on an after-tax basis as non-derivative net investment hedging instruments was $83 at September 30, 2015 and $84 at December 31, 2014.
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, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
3,440

 
$

 
$
136

 
$

 
$

 
Fair value
 
18 months to 19 years
Currency exchange contracts
749

 
16

 
1

 
6

 
5

 
Cash flow
 
1 to 36 months
Commodity contracts
1

 

 

 

 

 
Cash flow
 
1 to 12 months
Total
 
 
$
16

 
$
137

 
$
6

 
$
5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
3,465

 
$
43

 
 
 
$
24

 
 
 
 
 
1 to 12 months
Total
 
 
$
43

 
 
 
$
24

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
3,440

 
$

 
$
84

 
$

 
$
10

 
Fair value
 
2 to 19 years
Currency exchange contracts
432

 
8

 
1

 
5

 
3

 
Cash flow
 
1 to 36 months
Commodity contracts
1

 

 

 

 

 
Cash flow
 
1 to 12 months
Total
 
 
$
8

 
$
85

 
$
5

 
$
13

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,447

 
$
47

 
 
 
$
52

 
 
 
 
 
1 to 12 months
Total
 
 
$
47

 
 
 
$
52

 
 
 
 
 
 
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany sales and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts.

13

Table of Contents

The impact of derivative instruments to the Consolidated Statement of Income and Comprehensive Income follow:
 
Gain (loss) recognized in
other comprehensive
(loss) income
 
Location of gain
reclassified from
Accumulated other
comprehensive loss
 
Gain (loss) reclassified
from Accumulated other
comprehensive loss
 
Three months ended
September 30
 
 
 
Three months ended
September 30
 
2015
 
2014
 
 
 
2015
 
2014
Derivatives designated as
   cash flow hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
6

 
(3
)
 
Cost of products sold
 
5

 
1

Total
$
6

 
$
(3
)
 
 
 
$
5

 
$
1

 
Gain (loss) recognized in
other comprehensive
(loss) income
 
Location of gain
reclassified from
Accumulated other
comprehensive loss
 
Gain (loss) reclassified
from Accumulated other
comprehensive loss
 
Nine months ended
September 30
 
 
 
Nine months ended
September 30
 
2015

2014
 
 
 
2015
 
2014
Derivatives designated as cash
   flow hedges
 
 
 
 
 
 
 
 
 
Floating-to-fixed interest rate swaps
$

 
$

 
Interest expense - net
 
$

 
$
(1
)
Currency exchange contracts
16

 
2

 
Cost of products sold
 
11

 
5

Total
$
16

 
$
2

 
 
 
$
11

 
$
4

Amounts recognized in net income follow:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2015

2014
 
2015
 
2014
Derivatives designated as fair value hedges
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
65

 
$
(12
)
 
$
62

 
$
61

Related long-term debt converted to floating interest
   rates by interest rate swaps
(65
)
 
12

 
(62
)
 
(61
)
 
$

 
$

 
$

 
$

Gains and losses described above were recognized in Interest expense - net.

Note 12. INVENTORY
The components of inventory follow:
 
September 30,
2015
 
December 31,
2014
Raw materials
$
1,140

 
$
924

Work-in-process
242

 
422

Finished goods
1,136

 
1,201

Inventory at FIFO
2,518

 
2,547

Excess of FIFO over LIFO cost
(123
)
 
(119
)
Total inventory
$
2,395

 
$
2,428



14

Table of Contents

Note 13. 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 and Vehicle. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2014 Form 10-K.
 
Three months ended
September 30
 
Nine months ended
September 30
 
2015
 
2014
 
2015
 
2014
Net sales
 
 
 
 
 
 
 
Electrical Products
$
1,771

 
$
1,875

 
$
5,246

 
$
5,433

Electrical Systems and Services
1,487

 
1,655

 
4,437

 
4,807

Hydraulics
599

 
733

 
1,907

 
2,302

Aerospace
449

 
454

 
1,367

 
1,404

Vehicle
897

 
1,011

 
2,841

 
3,041

Total net sales
$
5,203

 
$
5,728

 
$
15,798

 
$
16,987

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Electrical Products
$
322

 
$
330

 
$
858

 
$
880

Electrical Systems and Services
164

 
238

 
573

 
601

Hydraulics
44

 
84

 
184

 
286

Aerospace
79

 
72

 
233

 
203

Vehicle
136

 
176

 
490

 
482

Total segment operating profit
745

 
900

 
2,338

 
2,452

 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
Litigation settlements

 

 

 
(644
)
Amortization of intangible assets
(102
)
 
(107
)
 
(306
)
 
(326
)
Interest expense - net
(59
)
 
(56
)
 
(175
)
 
(173
)
Pension and other postretirement benefits expense
(38
)
 
(31
)
 
(99
)
 
(114
)
Other corporate expense - net
(59
)
 
(64
)
 
(168
)
 
(43
)
Income before income taxes
487

 
642

 
1,590

 
1,152

Income tax expense (benefit)
42

 
37

 
143

 
(66
)
Net income
445

 
605

 
1,447

 
1,218

Less net loss (income) for noncontrolling interests
1

 
(3
)
 

 
(6
)
Net income attributable to Eaton ordinary shareholders
$
446

 
$
602

 
$
1,447

 
$
1,212


Note 14. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On November 20, 2012, Eaton Corporation issued senior notes totaling $4,900 to finance part of the cash portion of the acquisition of Cooper. On November 14, 2013, the senior notes were exchanged for senior notes registered under the Securities Act of 1933 (the Senior Notes). 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 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.

15


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 the third quarter of 2015, the Company undertook certain steps to restructure ownership of various subsidiaries. The transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. This restructuring has been reflected as of the beginning of the earliest period presented below.
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,755

 
$
1,664

 
$
3,105

 
$
(1,321
)
 
$
5,203

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,380

 
1,269

 
2,265

 
(1,317
)
 
3,597

Selling and administrative expense
2

 
375

 
191

 
339

 

 
907

Research and development expense

 
65

 
51

 
40

 

 
156

Interest expense (income) - net

 
54

 
5

 
(3
)
 
3

 
59

Other expense (income) - net

 
11

 
3

 
(17
)
 

 
(3
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(534
)
 
(266
)
 
(888
)
 
(66
)
 
1,754

 

Intercompany expense (income) - net
86

 
(54
)
 
258

 
(290
)
 

 

Income (loss) before income taxes
446

 
190


775


837


(1,761
)

487

Income tax expense (benefit)

 
17

 
(15
)
 
38

 
2

 
42

Net income (loss)
446

 
173


790


799


(1,763
)

445

Less net loss (income) for
   noncontrolling interests

 

 

 
1

 

 
1

Net income (loss) attributable to
   Eaton ordinary shareholders
$
446

 
$
173


$
790


$
800


$
(1,763
)

$
446

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(312
)
 
$
(28
)
 
$
(305
)
 
$
(415
)
 
$
748

 
$
(312
)
Total comprehensive income
  (loss) attributable to Eaton
  ordinary shareholders
$
134

 
$
145

 
$
485

 
$
385

 
$
(1,015
)
 
$
134


16


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2014
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,814

 
$
1,738

 
$
3,416

 
$
(1,240
)
 
$
5,728

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,402

 
1,266

 
2,489

 
(1,241
)
 
3,916

Selling and administrative expense
2

 
354

 
209

 
396

 

 
961

Research and development expense

 
63

 
49

 
51

 

 
163

Interest expense (income) - net

 
58

 
7

 
(8
)
 
(1
)
 
56

Other expense (income) - net

 
3

 
11

 
(24
)
 

 
(10
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(670
)
 
(251
)
 
(820
)
 
(232
)
 
1,973

 

Intercompany expense (income) - net
66

 
(59
)
 
293

 
(300
)
 

 

Income (loss) before income taxes
602

 
244


723


1,044


(1,971
)

642

Income tax expense (benefit)

 
12

 

 
25

 

 
37

Net income (loss)
602

 
232


723


1,019


(1,971
)

605

Less net loss (income) for
   noncontrolling interests

 

 

 
(3
)
 

 
(3
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
602

 
$
232


$
723


$
1,016


$
(1,971
)

$
602

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(567
)
 
$
8

 
$
(560
)
 
$
(696
)
 
$
1,248

 
$
(567
)
Total comprehensive income
   (loss) attributable to Eaton
   ordinary shareholders
$
35

 
$
240

 
$
163

 
$
320

 
$
(723
)
 
$
35

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
5,263

 
$
5,065

 
$
9,469

 
$
(3,999
)
 
$
15,798

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
4,123

 
3,837

 
6,864

 
(3,959
)
 
10,865

Selling and administrative expense
6

 
1,120

 
539

 
1,058

 

 
2,723

Research and development expense

 
202

 
145

 
125

 

 
472

Interest expense (income) - net

 
166

 
16

 
(10
)
 
3

 
175

Other expense (income) - net

 
17

 
(5
)
 
(39
)
 

 
(27
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(1,698
)
 
(536
)
 
(2,405
)
 
(323
)
 
4,962

 

Intercompany expense (income) - net
245

 
(362
)
 
1,010

 
(893
)
 

 

Income (loss) before income taxes
1,447

 
533


1,928


2,687


(5,005
)

1,590

Income tax expense (benefit)

 
36

 
(32
)
 
154

 
(15
)
 
143

Net income (loss)
1,447

 
497


1,960


2,533


(4,990
)

1,447

Less net loss (income) for
   noncontrolling interests

 

 

 
(1
)
 
1

 

Net income (loss) attributable to
   Eaton ordinary shareholders
$
1,447

 
$
497


$
1,960


$
2,532


$
(4,989
)

$
1,447

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(716
)
 
$
35

 
$
(691
)
 
$
(879
)
 
$
1,535

 
$
(716
)
Total comprehensive income
   (loss) attributable to Eaton
   ordinary shareholders
$
731

 
$
532

 
$
1,269

 
$
1,653

 
$
(3,454
)
 
$
731


17


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
 
Eaton Corporation plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
5,231

 
$
5,158

 
$
10,061

 
$
(3,463
)
 
$
16,987

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
4,122

 
3,772

 
7,354

 
(3,449
)
 
11,799

Selling and administrative expense
2

 
1,085

 
602

 
1,218

 

 
2,907

Litigation settlements

 
644

 

 

 

 
644

Research and development expense

 
185

 
151

 
157

 

 
493

Interest expense (income) - net

 
172

 
20

 
(22
)
 
3

 
173

Other expense (income) - net

 
(42
)
 
(81
)
 
(58
)
 

 
(181
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(1,370
)
 
(433
)
 
(1,567
)
 
32

 
3,338

 

Intercompany expense (income) - net
156

 
(176
)
 
571

 
(551
)
 

 

Income (loss) before income taxes
1,212

 
(326
)

1,690


1,931


(3,355
)

1,152

Income tax expense (benefit)

 
(257
)
 
71

 
126

 
(6
)
 
(66
)
Net income (loss)
1,212

 
(69
)

1,619


1,805


(3,349
)

1,218

Less net loss (income) for
   noncontrolling interests

 

 

 
(6
)
 

 
(6
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
1,212

 
$
(69
)

$
1,619


$
1,799


$
(3,349
)

$
1,212

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(481
)
 
$
75

 
$
(447
)
 
$
(626
)
 
$
998

 
$
(481
)
Total comprehensive income (loss) attributable to Eaton
ordinary shareholders
$
731

 
$
6

 
$
1,172

 
$
1,173

 
$
(2,351
)
 
$
731


18


CONDENSED CONSOLIDATING BALANCE SHEETS
SEPTEMBER 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$

 
$
145

 
$
12

 
$
261

 
$

 
$
418

Short-term investments

 

 
1

 
149

 

 
150

Accounts receivable - net

 
514

 
1,071

 
2,071

 

 
3,656

Intercompany accounts
   receivable
1

 
771

 
3,880

 
2,991

 
(7,643
)
 

Inventory

 
358

 
687

 
1,441

 
(91
)
 
2,395

Deferred income taxes

 
379

 
112

 
59

 

 
550

Prepaid expenses and
   other current assets

 
105

 
52

 
229

 
24

 
410

Total current assets
1

 
2,272


5,815


7,201

 
(7,710
)
 
7,579

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net

 
937

 
748

 
1,905

 

 
3,590

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill

 
1,355

 
6,256

 
5,929

 

 
13,540

Other intangible assets

 
185

 
3,671

 
2,283

 

 
6,139

Deferred income taxes

 
831

 
6

 
199

 
(790
)
 
246

Investment in subsidiaries
29,102

 
12,705

 
59,435

 
9,841

 
(111,083
)
 

Intercompany loans receivable

 
7,697

 
1,552

 
43,377

 
(52,626
)
 

Other assets

 
582

 
128

 
397

 

 
1,107

Total assets
$
29,103

 
$
26,564

 
$
77,611

 
$
71,132

 
$
(172,209
)
 
$
32,201

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

 
$

 
$

 
$
1

 
$

 
$
1

Current portion of
   long-term debt

 
600

 
241

 

 

 
841

Accounts payable

 
510

 
353

 
1,134

 

 
1,997

Intercompany accounts payable
111

 
4,022

 
2,444

 
1,066

 
(7,643
)
 

Accrued compensation

 
69

 
54

 
250

 

 
373

Other current liabilities
1

 
675

 
288

 
931

 
(7
)
 
1,888

Total current liabilities
112

 
5,876

 
3,380

 
3,382

 
(7,650
)
 
5,100

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
7,130

 
679

 
18

 
3

 
7,830

Pension liabilities

 
591

 
143

 
805

 

 
1,539

Other postretirement
   benefits liabilities

 
278

 
136

 
88

 

 
502

Deferred income taxes

 
14

 
1,033

 
563

 
(790
)
 
820

Intercompany loans payable
13,625

 
1,951

 
36,063

 
987

 
(52,626
)
 

Other noncurrent liabilities

 
414

 
170

 
413

 

 
997

Total noncurrent liabilities
13,625

 
10,378


38,224


2,874


(53,413
)

11,688

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
15,366

 
10,310

 
36,007

 
64,836

 
(111,153
)
 
15,366

Noncontrolling interests

 

 

 
40

 
7

 
47

Total equity
15,366

 
10,310

 
36,007

 
64,876

 
(111,146
)
 
15,413

Total liabilities and equity
$
29,103

 
$
26,564


$
77,611


$
71,132


$
(172,209
)

$
32,201


19


CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2014
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$
1

 
$
173

 
$
13

 
$
594

 
$

 
$
781

Short-term investments

 

 
1

 
244

 

 
245

Accounts receivable - net

 
500

 
955

 
2,212

 

 
3,667

Intercompany accounts
   receivable
2

 
759

 
3,820

 
4,101

 
(8,682
)
 

Inventory

 
397

 
637

 
1,445

 
(51
)
 
2,428

Deferred income taxes

 
368

 
132

 
93

 

 
593

Prepaid expenses and
   other current assets

 
96

 
39

 
247

 
4

 
386

Total current assets
3

 
2,293

 
5,597

 
8,936

 
(8,729
)
 
8,100

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net

 
972

 
756

 
2,022

 

 
3,750

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill

 
1,355

 
6,256

 
6,282

 

 
13,893

Other intangible assets

 
196

 
3,811

 
2,549

 

 
6,556

Deferred income taxes

 
889

 
10

 
137

 
(808
)
 
228

Investment in subsidiaries
26,612

 
12,198

 
58,680

 
9,145

 
(106,635
)
 

Intercompany loans receivable

 
7,542

 
2,249

 
40,635

 
(50,426
)
 

Other assets

 
473

 
141

 
388

 

 
1,002

Total assets
$
26,615

 
$
25,918

 
$
77,500

 
$
70,094

 
$
(166,598
)
 
$
33,529

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

 
$

 
$

 
$
2

 
$

 
$
2

Current portion of
   long-term debt

 
702

 
304

 
2

 

 
1,008

Accounts payable

 
475

 
340

 
1,125

 

 
1,940

Intercompany accounts payable
117

 
4,087

 
3,441

 
1,037

 
(8,682
)
 

Accrued compensation

 
112

 
59

 
249

 

 
420

Other current liabilities
1

 
674

 
340

 
984

 
(14
)
 
1,985

Total current liabilities
118

 
6,050

 
4,484

 
3,399

 
(8,696
)
 
5,355

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
7,079

 
932

 
13

 

 
8,024

Pension liabilities

 
726

 
183

 
903

 

 
1,812

Other postretirement
   benefits liabilities

 
283

 
136

 
94

 

 
513

Deferred income taxes

 

 
1,160

 
549

 
(808
)
 
901

Intercompany loans payable
10,711

 
2,723

 
36,162

 
830

 
(50,426
)
 

Other noncurrent liabilities

 
457

 
183

 
445

 

 
1,085

Total noncurrent liabilities
10,711

 
11,268


38,756


2,834


(51,234
)

12,335

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
15,786

 
8,600

 
34,260

 
63,816

 
(106,676
)
 
15,786

Noncontrolling interests

 

 

 
45

 
8

 
53

Total equity
15,786

 
8,600

 
34,260

 
63,861

 
(106,668
)
 
15,839

Total liabilities and equity
$
26,615

 
$
25,918


$
77,500


$
70,094


$
(166,598
)

$
33,529


20


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
(85
)
 
$
(93
)
 
$
(23
)
 
$
1,830

 
$

 
$
1,629

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Cash paid for acquisitions of
businesses, net of cash acquired

 

 

 
(38
)
 

 
(38
)
Capital expenditures for property,
   plant and equipment

 
(68
)
 
(100
)
 
(200
)
 

 
(368
)
Sales (purchases) of short-term investments - net

 

 

 
76

 

 
76

Investments in affiliates
(1,482
)
 

 
(1,176
)
 
(1,482
)
 
4,140

 

Loans to affiliates

 
(307
)
 
(39
)
 
(7,638
)
 
7,984

 

Repayments of loans from affiliates

 
306

 
58

 
5,514

 
(5,878
)
 

Proceeds from sale of business

 

 

 
1

 

 
1

Other - net

 
(41
)
 
33

 
(36
)
 

 
(44
)
Net cash provided by (used in) investing activities
(1,482
)
 
(110
)

(1,224
)

(3,803
)

6,246


(373
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 

 

 
1

 

 
1

Payments on borrowings

 
(102
)
 
(301
)
 
(2
)
 

 
(405
)
Proceeds from borrowings from
   affiliates
2,783

 
4,577

 
581

 
43

 
(7,984
)
 

Payments on borrowings from
   affiliates
(40
)
 
(4,617
)
 
(1,160
)
 
(61
)
 
5,878

 

Capital contributions from affiliates

 
1,176

 
1,482

 
1,482

 
(4,140
)
 

Other intercompany financing
   activities

 
(859
)
 
644

 
215

 

 

Cash dividends paid
(771
)
 

 

 

 

 
(771
)
Exercise of employee stock options
48

 

 

 

 

 
48

Repurchase of shares
(454
)
 

 

 

 

 
(454
)
Other - net

 

 

 
(8
)
 

 
(8
)
Net cash provided by (used in)
   financing activities
1,566

 
175


1,246


1,670


(6,246
)

(1,589
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(30
)
 

 
(30
)
Total increase (decrease) in cash
(1
)
 
(28
)

(1
)

(333
)



(363
)
Cash at the beginning of the period
1

 
173

 
13

 
594

 

 
781

Cash at the end of the period
$

 
$
145


$
12


$
261


$


$
418


21


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2014
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
(4
)
 
$
(699
)
 
$
172

 
$
1,433

 
$
32

 
$
934

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(78
)
 
(94
)
 
(206
)
 

 
(378
)
Sales (purchases) of short-term
investments - net

 

 
132

 
313

 

 
445

Loans to affiliates

 
(151
)
 

 
(6,347
)
 
6,498

 

Repayments of loans from affiliates

 
176

 
213

 
5,133

 
(5,522
)
 

Proceeds from sale of businesses

 
93

 
175

 
14

 

 
282

Other - net

 
(40
)
 
46

 
(62
)
 

 
(56
)
Net cash provided by (used in)
   investing activities

 


472


(1,155
)

976


293

 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Payments on borrowings

 
(552
)
 
(1
)
 
(27
)
 

 
(580
)
Proceeds from borrowings from
   affiliates
726

 
5,510

 
254

 
8

 
(6,498
)
 

Payments on borrowings from
   affiliates
(25
)
 
(4,794
)
 
(320
)
 
(383
)
 
5,522

 

Other intercompany financing activities
218

 
574

 
(554
)
 
(238
)
 

 

Cash dividends paid
(700
)
 

 

 

 

 
(700
)
Cash dividends paid to affiliates

 

 

 
32

 
(32
)
 

Exercise of employee stock options
50

 

 

 

 

 
50

Repurchase of shares
(267
)
 

 

 

 

 
(267
)
Excess tax benefit from
   equity-based compensation

 
20

 

 

 

 
20

Other - net

 

 

 
(3
)
 

 
(3
)
Net cash provided by (used in)
   financing activities
2

 
758


(621
)

(611
)

(1,008
)

(1,480
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(7
)
 

 
(7
)
Total increase (decrease) in cash
(2
)
 
59


23


(340
)



(260
)
Cash at the beginning of the period
3

 
51

 
10

 
851

 

 
915

Cash at the end of the period
$
1

 
$
110


$
33


$
511


$


$
655



22

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 2014 net sales of $22.6 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic, and mechanical power more efficiently, safely, and sustainably. Eaton has approximately 99,000 employees in over 60 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 ordinary share-diluted follows:
 
Three months ended
September 30
 
Nine months ended
September 30
 
2015
 
2014
 
2015
 
2014
Net sales
$
5,203

 
$
5,728

 
$
15,798

 
$
16,987

Net income attributable to Eaton ordinary shareholders
446

 
602

 
1,447

 
1,212

Net income per ordinary share - diluted
$
0.96

 
$
1.26

 
$
3.09

 
$
2.53

During the third quarter of 2015, Eaton took actions to reduce its cost structure in all business segments and at corporate. The restructuring charges are primarily comprised of severance costs and were $113 in the third quarter of 2015. These restructuring activities are anticipated to be $10 in the fourth quarter of 2015 and $30 in 2016. Our savings from this program were $15 in the third quarter of 2015. We anticipate annualized savings of $160.

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 operating earnings, operating earnings per ordinary share, and operating profit before acquisition integration charges for each business segment as well as corporate, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of operating earnings and operating earnings per ordinary share to the most directly comparable GAAP measure is included in the table below. Operating profit before acquisition integration charges is reconciled in the discussion of the operating results of each business segment, and excludes acquisition integration expense related primarily to integration of Cooper Industries plc (Cooper). Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment. For additional information on acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.


23

Table of Contents

Consolidated Financial Results
 
Three months ended
September 30
 
Decrease
 
Nine months ended
September 30
 
Increase
(decrease)
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
5,203

 
$
5,728

 
(9
)%
 
$
15,798

 
$
16,987

 
(7
)%
Gross profit
1,606

 
1,812

 
(11
)%
 
4,933

 
5,188

 
(5
)%
Percent of net sales
30.9
%
 
31.6
%
 
 
 
31.2
%
 
30.5
%
 
 
Income before income taxes
487

 
642

 
(24
)%
 
1,590

 
1,152

 
38
 %
Net income
445

 
605

 
(26
)%
 
1,447

 
1,218

 
19
 %
Less net income for noncontrolling interests
1

 
(3
)
 
 
 

 
(6
)
 
 
Net income attributable to Eaton
   ordinary shareholders
446

 
602

 
(26
)%
 
1,447

 
1,212

 
19
 %
Excluding acquisition integration charges (after-tax)
7

 
14

 
 
 
22

 
81

 
 
Operating earnings
$
453

 
$
616

 
(26
)%
 
$
1,469

 
$
1,293

 
14
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income per ordinary share - diluted
$
0.96

 
$
1.26

 
(24
)%
 
$
3.09

 
$
2.53

 
22
 %
Excluding per share impact of acquisition
   integration charges costs (after-tax)
0.01

 
0.03

 
 
 
0.05

 
0.17

 
 
Operating earnings per ordinary share
$
0.97

 
$
1.29

 
(25
)%
 
$
3.14

 
$
2.70

 
16
 %
Net Sales
Net sales decreased 9% in the third quarter of 2015 compared to the third quarter of 2014 due to a decrease of 6% from the impact of currency translation and decline in organic sales of 3%. Net sales decreased 7% in the first nine months of 2015 compared to the first nine months of 2014 due to a decrease 6% from the impact of currency translation and a 1% decline in organic sales. The decrease in organic sales is primarily due to weakening demand in several of the Company's end markets.
Gross Profit
Gross profit margin decreased from 31.6% in the third quarter of 2014 to 30.9% in the third quarter of 2015. The decrease in gross margin is primarily due to the restructuring charge recorded in the third quarter of 2015, partially offset by efficiencies realized as a result of cost saving activities. Gross profit margin during the first nine months increased from 30.5% in 2014 to 31.2% in 2015. The increase in the gross profit margin for the first nine months of 2015 was primarily due to actions taken over the past year to realize greater efficiencies and the beneficial impact of new product introductions, offset by the restructuring charge recognized in the third quarter of 2015.
Income Taxes
The effective income tax rate for the third quarter and first nine months of 2015 was an expense of 9%, compared to an expense of 6% and a benefit 6% for the third quarter and first nine months of 2014, respectively. Excluding the litigation settlements and related legal costs as well as the gain on the sale of Eaton's Aerospace businesses, all of which represents a total pre-tax expense of $494 in the second quarter of 2014, the effective income tax rate for the first nine months of 2014 was an expense of 6%. The increase in the effective tax rate in the third quarter and first nine months of 2015 is primarily due to more income earned in higher tax jurisdictions, including the United States.
Operating Earnings
Operating earnings, a non-GAAP measure discussed above in Non-GAAP Financial Measures, of $453 in the third quarter of 2015 decreased 26% compared to Operating earnings of $616 in the third quarter of 2014. Operating earnings for the first nine months of 2015 were $1,469, an increase of 14% compared to Operating earnings of $1,293 in the first nine months of 2014. The decrease in Operating earnings in the third quarter of 2015 was primarily due to lower sales volume and $113 of restructuring charges in the third quarter of 2015, partially offset by $15 of savings resulting from the restructuring actions and other cost control measures. The increase in Operating earnings in the first nine months of 2015 was primarily due to lower income in the second quarter of 2014 as a result of the litigation settlements, partially offset by the gain on the sale of the Aerospace businesses. Excluding litigation settlements and gain on sale, operating earnings declined in the first nine months of 2015 due to lower sales volume, the negative impact of currency translation, a higher tax rate, and restructuring charges incurred in the third quarter of 2015, offset by savings resulting from the restructuring actions and other cost control measures.

24

Table of Contents

Operating earnings per ordinary share decreased to $0.97 in the third quarter of 2015 compared to $1.29 in the third quarter of 2014. Operating earnings per ordinary share increased to $3.14 in the first nine months of 2015 compared to $2.70 in the first nine months of 2014. The decrease in Operating earnings per ordinary share for the three months ended September 30, 2015 is due to lower Operating earnings, partially offset by the impact of the Company's share repurchases in the third quarter of 2015. The increase in Operating earnings per ordinary share for first nine months of 2015 is due to higher Operating Earnings.
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 charges. For additional information related to acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.
Electrical Products
 
Three months ended
September 30
 
Decrease
 
Nine months ended
September 30
 
Decrease
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
1,771

 
$
1,875

 
(6
)%
 
$
5,246

 
$
5,433

 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
322

 
$
330

 
(2
)%
 
$
858

 
$
880

 
(3
)%
Operating margin
18.2
%
 
17.6
%
 
 
 
16.4
%
 
16.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
5

 
$
8

 
 
 
$
17

 
$
49

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
327

 
$
338

 
(3
)%
 
$
875

 
$
929

 
(6
)%
Operating margin
18.5
%
 
18.0
%
 
 
 
16.7
%
 
17.1
%
 
 
Net sales decreased 6% in the third quarter of 2015 compared to the third quarter of 2014 primarily due to the impact of currency translation. Net sales decreased 3% in the first nine months of 2015 due to a decrease of 5% from the impact of currency translation, partially offset by an increase in organic sales of 2%. Organic sales growth in the first nine months of 2015 was due to strength in the Americas region.
Operating margin before acquisition integration charges increased from 18.0% in the third quarter of 2014 to 18.5% in the third quarter of 2015. Operating margin before acquisition integration charges decreased from 17.1% in the first nine months of 2014 to 16.7% in the first nine months of 2015. The increase in operating margin during the third quarter of 2015 was due to cost control measures and $1 savings from restructuring actions, offset by decreased sales and $11 of restructuring charges. The decrease in operating margin in the first nine months of 2015 was primarily due to unfavorable product mix and $11 of restructuring charges, partially offset by $1 of savings from the restructuring actions and other cost control measures.
Electrical Systems and Services
 
Three months ended
September 30
 
Decrease
 
Nine months ended
September 30
 
Decrease
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
1,487

 
$
1,655

 
(10
)%
 
$
4,437

 
$
4,807

 
(8
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
164

 
$
238

 
(31
)%
 
$
573

 
$
601

 
(5
)%
Operating margin
11.0
%
 
14.4
%
 
 
 
12.9
%
 
12.5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
3

 
$
4

 
 
 
$
10

 
$
43

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
167

 
$
242

 
(31
)%
 
$
583

 
$
644

 
(9
)%
Operating margin
11.2
%
 
14.6
%
 
 
 
13.1
%
 
13.4
%
 
 

25

Table of Contents

Net sales decreased 10% in the third quarter of 2015 compared to the third quarter of 2014 due to a decrease of 5% from the impact of currency translation and a decrease in organic sales of 5%. Net sales decreased 8% in the first nine months of 2015 compared to 2014 due to a decrease of 5% from the impact of currency translation and a decrease in organic sales of 3%. The organic sales decline during the third quarter and first nine months of 2015 was primarily due to weakness in global oil and gas and other industrial markets.
Operating margin before acquisition integration charges decreased from 14.6% in the third quarter of 2014 to 11.2% in the third quarter of 2015. Operating margin before acquisition integration charges decreased from 13.4% in the first nine months of 2014 to 13.1% in 2015. The decrease in operating margin for the third quarter was primarily due to lower sales volumes, unfavorable product mix, and $26 of restructuring charges, partially offset by $2 of savings from the restructuring actions and savings resulting from cost control measures. The decrease in operating margin in the first nine months of 2015 was primarily due to lower sales volumes, unfavorable product mix, and $26 of restructuring charges, partially offset by $2 of savings from the restructuring actions and savings resulting from cost control measures.
Hydraulics
 
Three months ended
September 30
 
Decrease
 
Nine months ended
September 30
 
Decrease
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
599

 
$
733

 
(18
)%
 
$
1,907

 
$
2,302

 
(17
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
44

 
$
84

 
(48
)%
 
$
184

 
$
286

 
(36
)%
Operating margin
7.3
%
 
11.5
%
 
 
 
9.6
%
 
12.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$

 
$
2

 
 
 
$
2

 
$
11

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
44

 
$
86

 
(49
)%
 
$
186

 
$
297

 
(37
)%
Operating margin
7.3
%
 
11.7
%
 
 
 
9.8
%
 
12.9
%
 
 
Net sales decreased 18% in the third quarter of 2015 compared to the third quarter of 2014 due to a decrease of organic sales of 10% and a decrease of 8% from the impact of currency translation. Net sales decreased 17% in the first nine months 2015 compared to 2014 due to a decrease of organic sales of 10% and a decrease of 7% from the impact of currency translation. The decrease in organic sales in the third quarter and first nine months of 2015 was primarily due to broad weakness in global hydraulics markets.
Operating margin before acquisition integration charges decreased from 11.7% in the third quarter of 2014 to 7.3% in the third quarter of 2015. Operating margin before acquisition integration charges decreased from 12.9% in the first nine months of 2014 to 9.8% in 2015. The decrease in operating margin in the third quarter and first nine months of 2015 was primarily due to lower sales volumes and $25 of restructuring charges taken in the third quarter of 2015, partially offset by $3 of savings from the restructuring actions, current year cost control measures, and efficiencies generated from certain restructuring activities taken in 2014.
Aerospace
 
Three months ended
September 30
 
Increase
(decrease)
 
Nine months ended
September 30
 
Increase
(decrease)
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
449

 
$
454

 
(1
)%
 
$
1,367

 
$
1,404

 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
79

 
$
72

 
10
 %
 
$
233

 
$
203

 
15
 %
Operating margin
17.6
%
 
15.9
%
 
 
 
17.0
%
 
14.5
%
 
 
Net sales in the third quarter of 2015 decreased 1% compared to the third quarter of 2014 due to a decrease of 2% from the impact of currency translation offset by a 1% increase in organic sales. Net sales decreased 3% during the first nine months of 2015 compared to 2014 due to a decrease of 2% from the impact of currency translation and a decrease of 3% from the divestiture of Eaton's Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions business in the second quarter of 2014, partially offset by a 2% increase in organic sales. The increase in organic sales during 2015 was related to higher aftermarket sales and strength in commercial OEM markets, offset by weakness in military OEM markets.

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Table of Contents

Operating margin increased from 15.9% in the third quarter of 2014 to 17.6% in the third quarter of 2015. Operating margin increased from 14.5% in the first nine months of 2014 compared to 17.0% in the first nine months of 2015. The increase in operating margin in the third quarter and first nine months of 2015 was primarily due to favorable product mix and savings resulting from cost control measures, partially offset by $5 of restructuring charges in the third quarter of 2015.
Vehicle
 
Three months ended
September 30
 
Decrease
 
Nine months ended
September 30
 
Increase
(decrease)
 
2015
 
2014
 
 
2015
 
2014
 
Net sales
$
897

 
$
1,011

 
(11
)%
 
$
2,841

 
$
3,041

 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
136

 
$
176

 
(23
)%
 
$
490

 
$
482

 
2
 %
Operating margin
15.2
%
 
17.4
%
 
 
 
17.2
%
 
15.9
%
 
 
Net sales decreased 11% in the third quarter of 2015 compared to the third quarter of 2014 due to a decrease of 8% from the impact of currency translation and 3% decline in organic sales. The decrease in organic sales is due to weakness in South American and Asian markets. Net sales decreased 7% in the first nine months of 2015 compared to the first nine months of 2014 due to a decrease of 8% from currency translation, partially offset by 1% growth in organic sales. The increase in organic sales for the nine months of 2015 was primarily due to improved demand in North American truck and automotive markets, partially offset by weakness in South American markets.
Operating margin decreased from 17.4% in the third quarter of 2014 to 15.2% in the third quarter of 2015. The decrease in operating margin for the third quarter of 2015 is primarily due to $29 of restructuring charges, partially offset by favorable product mix, $2 of savings from the restructuring actions in the third quarter, and savings results from cost control measures. Operating margin increased from 15.9% in the first nine months of 2014 to 17.2% in the first nine months of 2015. The increase in operating margin in the first nine months of 2015 was primarily due to favorable mix, savings resulting from cost control measures, $2 of savings from the restructuring activities in the third quarter, and efficiencies generated from certain restructuring actions taken in 2014, partially offset by $29 of restructuring charges in the third quarter.
Corporate Expense
 
Three months ended
September 30
 
Increase
(decrease)
 
Nine months ended
September 30
 
Increase
(decrease)
 
2015
 
2014
 
 
2015
 
2014
 
Litigation settlements
$

 
$

 
NM

 
$

 
$
644

 
NM

Amortization of intangible assets
102

 
107

 
(5
)%
 
306

 
326

 
(6
)%
Interest expense - net
59

 
56

 
5
 %
 
175

 
173

 
1
 %
Pension and other postretirement
   benefits expense
38

 
31

 
23
 %
 
99

 
114

 
(13
)%
Gain on divestiture of Aerospace businesses

 
2

 
NM

 

 
(154
)
 
NM

Other corporate expense - net
59

 
62

 
(5
)%
 
168

 
197

 
(15
)%
Total corporate expense
$
258

 
$
258

 
 %
 
$
748

 
$
1,300

 
(42
)%
Total corporate expense remained flat at $258 for the third quarter of 2015 as compared to the third quarter of 2014. Total corporate expense decreased 42% from $1,300 in the first nine months of 2014 to $748 in first nine months of 2015. The decrease in Total corporate expense for nine months ended September 30, 2015 was primarily due to litigation settlements of $644 incurred in the second quarter of 2014, partially offset by a gain of $154 on the divestiture of Eaton's Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions businesses. Excluding the litigation settlement charge and gain on sale, corporate expenses decreased 8% for the nine months ending September 30, 2015 as compared to nine months ended September 30, 2014 due to lower Amortization of intangible assets expense, lower Pension and other postretirement benefits expense related to lower lump sum settlements in the first quarter of 2015, and a decrease in Other corporate expenses - net due to cost control measures.


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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 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, 2015. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes its operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets are substantially 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 $1,629 in the first nine months of 2015, an increase of $695 compared to $934 in the first nine months of 2014. The increase in net cash provided by operating activities in 2015 was primarily due to payments totaling $654 for the Meritor, Triumph and related litigation that occurred in the third quarter of 2014.
Investing Cash Flow
Net cash used in investing activities was $373 in the first nine months of 2015, a decrease of $666 compared to net cash provided by investing activities of $293 in the first nine months of 2014. Investing cash flows were impacted by a $369 decline in proceeds from the sale of short-term investments, which totaled $445 in 2014 and $76 in 2015. The investing cash flow decrease was also due to the absence of proceeds from the sale of businesses, which totaled $282 in 2014 and was related to the Aerospace divestitures. The remaining decrease is due to cash paid for acquisitions of businesses of $38 in 2015.
Financing Cash Flow
Net cash used in financing activities was $1,589 in the first nine months of 2015, an increase of $109 in the use of cash compared to $1,480 in the first nine months of 2014. The higher use of cash during 2015 was primarily due to increases of $187 in share repurchases and $71 in cash dividends. These financing cash outflows were offset by a decrease of $175 in payments on borrowings, which totaled $580 in the first nine months of 2014 and $405 in the first nine months of 2015.

FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning litigation developments, and the charges and benefits of restructuring actions, 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 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 or unexpected developments in any such pending proceedings; 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, 2014.


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Table of Contents

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 Alexander M. Cutler - 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, 2015.
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 2015, 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

ITEM 1.
LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 7 of the Notes to the Condensed Consolidated Financial Statements.

ITEM 1A.
RISK FACTORS.
“Item 1A. Risk Factors” in Eaton's 2014 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 2014 Form 10-K.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
During the third quarter of 2015, 4.8 million ordinary shares were repurchased in the open market at a total cost of $284 million. These shares were repurchased under the program announced and approved by shareholders on April 24, 2013 and approved by the Board of Directors on October 22, 2013. A summary of the shares repurchased in the third quarter of 2015 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
 
Maximum number
of shares that may
yet be purchased
under the plans
or programs
July
 
1,825,000

 
$
61.21

 
1,825,000

 
26,206,817

August
 
2,684,170

 
$
58.62

 
2,684,170

 
23,522,647

September
 
276,781

 
$
54.85

 
276,781

 
23,245,866

Total
 
4,785,951

 
$
59.39

 
4,785,951

 
 

ITEM 6.
EXHIBITS.
Exhibits — See Exhibit Index attached.


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Table of Contents

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:
October 30, 2015
By:
/s/ Richard H. Fearon
 
 
 
 
Richard H. Fearon
 
 
 
 
Principal Financial Officer
 
 
 
(On behalf of the registrant and as Principal Financial Officer)
 
 
 
 
 


30

Table of Contents

Eaton Corporation plc
Third Quarter 2015 Report on Form 10-Q
Exhibit Index
3 (i)
 
Certificate of Incorporation - Incorporated by reference to the Form S-8 filed November 30, 2012
 
 
 
3 (ii)
 
Amended and restated Memorandum and Articles of Incorporation - Incorporated by reference to the Form 10-Q Report for the three months ended September 30, 2012
 
 
 
4 (a)
 
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 other long-term debt
 
 
 
12
 
Ratio of Earnings to Fixed Charges — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.1
 
Certification of Principal Executive Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.2
 
Certification of Principal Financial Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.1
 
Certification of Principal Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.2
 
Certification of Principal Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
91.1
 
FRS 102 Notification (incorporated herein by reference to Exhibit 91.1 to Form 10-Q for the quarter ended June 30, 2015 filed with the Securities and Exchange Commission on July 29, 2015.)
 
 
 
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 September 30, 2015 and 2014, (ii) Consolidated Statements of Comprehensive Income for the three months ended September 30, 2015 and 2014, (iii) Condensed Consolidated Balance Sheets at September 30, 2015 and December 31, 2014, (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014 and (v) Notes to Condensed Consolidated Financial Statements for the nine months ended September 30, 2015.


31