ETN 03.31.2015 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 March 31, 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 (440) 523-5000
 
 
 
 
 
 
(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 467.1 million Ordinary Shares outstanding as of March 31, 2015.
 


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)
2015
 
2014
Net sales
$
5,223

 
$
5,492

 
 
 
 
Cost of products sold
3,593

 
3,858

Selling and administrative expense
915

 
962

Research and development expense
158

 
162

Interest expense - net
57

 
62

Other income - net
(5
)
 
(5
)
Income before income taxes
505

 
453

Income tax expense
38

 
12

Net income
467

 
441

Less net income for noncontrolling interests
(1
)
 
(2
)
Net income attributable to Eaton ordinary shareholders
$
466

 
$
439

 
 
 
 
Net income per ordinary share
 
 
 
Diluted
$
0.99

 
$
0.92

Basic
1.00

 
0.92

 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
Diluted
470.0

 
478.8

Basic
467.9

 
475.8

 
 
 
 
Cash dividends declared per ordinary share
$
0.55

 
$
0.49


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

2
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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
 
Three months ended
March 31
(In millions)
 
2015
 
2014
Net income
 
$
467

 
$
441

Less net income for noncontrolling interests
 
(1
)
 
(2
)
Net income attributable to Eaton ordinary shareholders
 
466

 
439

 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
Currency translation and related hedging instruments
 
(720
)
 
(47
)
Pensions and other postretirement benefits
 
86

 
50

Other comprehensive (loss) income attributable to Eaton
   ordinary shareholders
 
(634
)
 
3

 
 


 


Total comprehensive (loss) income attributable to Eaton
  ordinary shareholders
 
$
(168
)
 
$
442


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


3
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EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Current assets
 
 
 
Cash
$
663

 
$
781

Short-term investments
139

 
245

Accounts receivable - net
3,733

 
3,667

Inventory
2,424

 
2,428

Deferred income taxes
576

 
593

Prepaid expenses and other current assets
405

 
386

Total current assets
7,940

 
8,100

 
 
 
 
Property, plant and equipment - net
3,634

 
3,750

 
 
 
 
Other noncurrent assets
 
 
 
Goodwill
13,548

 
13,893

Other intangible assets
6,317

 
6,556

Deferred income taxes
220

 
228

Other assets
1,037

 
1,002

Total assets
$
32,696

 
$
33,529

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
267

 
$
2

Current portion of long-term debt
1,244

 
1,008

Accounts payable
1,969

 
1,940

Accrued compensation
282

 
420

Other current liabilities
1,904

 
1,985

Total current liabilities
5,666

 
5,355

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
7,829

 
8,024

Pension liabilities
1,530

 
1,812

Other postretirement benefits liabilities
506

 
513

Deferred income taxes
881

 
901

Other noncurrent liabilities
1,020

 
1,085

Total noncurrent liabilities
11,766

 
12,335

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
15,210

 
15,786

Noncontrolling interests
54

 
53

Total equity
15,264

 
15,839

Total liabilities and equity
$
32,696

 
$
33,529


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

4
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EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Three months ended
March 31
(In millions)
2015
 
2014
Operating activities
 
 
 
Net income
$
467

 
$
441

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
226

 
249

Deferred income taxes
14

 
(24
)
Pension and other postretirement benefits expense
76

 
99

Contributions to pension plans
(223
)
 
(272
)
Contributions to other postretirement benefits plans
(9
)
 
(12
)
Excess tax benefit from equity-based compensation
—

 
(20
)
Changes in working capital
(372
)
 
(370
)
Other - net
(102
)
 
(79
)
Net cash provided by operating activities
77

 
12

 
 
 
 
Investing activities
 

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

Capital expenditures for property, plant and equipment
(105
)
 
(110
)
Sales of short-term investments - net
99

 
431

Proceeds from sale of businesses
—

 
3

Other - net
(9
)
 
(20
)
Net cash (used in) provided by investing activities
(53
)
 
304

 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
266

 
—

Payments on borrowings
(3
)
 
(257
)
Cash dividends paid
(251
)
 
(229
)
Exercise of employee stock options
33

 
23

Repurchase of shares
(170
)
 
—

Excess tax benefit from equity-based compensation
—

 
20

Other - net
(2
)
 
—

Net cash used in financing activities
(127
)
 
(443
)
 
 
 
 
Effect of currency on cash
(15
)
 
(4
)
Total decrease in cash
(118
)
 
(131
)
Cash at the beginning of the period
781

 
915

Cash at the end of the period
$
663

 
$
784


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 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 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 April 2015, the FASB proposed to defer the effective date of the new standard for one year. If the proposal is approved, then early adoption as of the original effective date would be permitted. 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 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.


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Note 3.
ACQUISITION INTEGRATION CHARGES
Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:
 
Three months ended
March 31
 
2015
 
2014
Acquisition integration charges
 
 
 
Electrical Products
$
6

 
$
29

Electrical Systems and Services
3

 
26

Hydraulics
1

 
4

Total business segments
10

 
59

Corporate
1

 
7

Total acquisition integration charges before income taxes
$
11

 
$
66

Total after income taxes
$
7

 
$
44

Per ordinary share - diluted
$
0.02

 
$
0.09

Business segment integration charges during the first three months of 2015 and 2014 were related primarily to the integration of Cooper Industries plc (Cooper) to gain efficiencies in selling, marketing, traditional back-office functions and 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 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.
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
 
—

 
22

 
—

 
—

 
—

 
22

Translation adjustments
 
(206
)
 
(98
)
 
(51
)
 
(6
)
 
(6
)
 
(367
)
March 31, 2015
 
$
6,734

 
$
4,238

 
$
1,276

 
$
956

 
$
344

 
$
13,548


Note 5.
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
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
31

 
$
29

 
$
18

 
$
16

 
$
2

 
$
4

Interest cost
39

 
40

 
18

 
22

 
6

 
9

Expected return on plan assets
(66
)
 
(61
)
 
(25
)
 
(25
)
 
(1
)
 
(1
)
Amortization
30

 
23

 
10

 
7

 
—

 
2

 
34

 
31

 
21

 
20

 
7

 
14

Settlement loss
14

 
34

 
—

 
—

 
—

 
—

Total expense
$
48

 
$
65

 
$
21

 
$
20

 
$
7

 
$
14


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Note 6.
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 March 31, 2015, the Company has a total accrual of 85 Brazilian Reais related to this matter ($26 based on current exchange rates), comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($18 based on current exchange rates) with an additional 25 Brazilian Reais recognized through March 31, 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.

Note 7.
INCOME TAXES
The effective income tax rate for the first quarter of 2015 was expense of 8% compared to expense of 3% for the first quarter of 2014. The increase in the effective income tax rate in first quarter of 2015 is primarily due to more income earned in higher tax jurisdictions including the United States.

Note 8.
EQUITY
Eaton has an ordinary share repurchase program (2013 Program) that authorizes the repurchase of 40 million ordinary shares. During the first quarter of 2015, 2.4 million ordinary shares were repurchased under the 2013 Program in the open market at a total cost of $170.
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
466

 
1

 
467

Other comprehensive loss
(634
)
 
—

 
(634
)
Cash dividends paid and accrued
(257
)
 
—

 
(257
)
Issuance of shares under equity-based compensation plans - net
19

 
—

 
19

Repurchase of shares
(170
)
 
—

 
(170
)
Balance at March 31, 2015
$
15,210

 
$
54

 
$
15,264

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
(720
)
 
51

 
1

 
(668
)
Amounts reclassified from Accumulated other
   comprehensive loss
—

 
35

 
(1
)
 
34

Net current-period Other comprehensive
   (loss) income
(720
)
 
86

 
—

 
(634
)
Balance at March 31, 2015
$
(2,134
)
 
$
(1,399
)
 
$
—

 
$
(3,533
)

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The reclassifications out of Accumulated other comprehensive loss follow:
 
Three months ended March 31, 2015
 
Consolidated statements
of income classification
Amortization of pensions and other postretirement benefits items
 
 
 
Actuarial loss and prior service cost
$
(54
)
 
1 
Tax benefit
19

 
 
Total, net of tax
(35
)
 
 
 
 
 
 
Gains and (losses) on cash flow hedges
 
 
 
Currency exchange contracts
2

 
Cost of products sold
Tax expense
(1
)
 
 
Total, net of tax
1

 
 
 
 
 
 
Total reclassifications for the period
$
(34
)
 
 
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 5 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
March 31
(Shares in millions)
2015
 
2014
Net income attributable to Eaton ordinary shareholders
$
466

 
$
439

 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
470.0

 
478.8

Less dilutive effect of equity-based compensation
2.1

 
3.0

Weighted-average number of ordinary shares outstanding - basic
467.9

 
475.8

 
 
 
 
Net income per ordinary share
 
 
 
Diluted
$
0.99

 
$
0.92

Basic
1.00

 
0.92

For the first quarter 2015 and 2014, 0.9 million and 0.1 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 9.
EQUITY-BASED COMPENSATION

In February 2015, the Compensation and Organization Committee of the Board of Directors approved the grant of performance share units (PSUs) to certain employees that vest based on the satisfaction of a three-year service period and the achievement of certain performance metrics. The maximum number of ordinary shares that may be issued under this grant award is 911,050. The fair value of these PSUs is determined based on the closing market price of the Company’s ordinary shares at the date of grant. Equity-based compensation expense is recognized over the period an employee is required to provide service based on the number of PSUs for which achievement of the performance objectives is probable.
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.

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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, 2015
 
 
 
 
 
 
 
Cash
$
663

 
$
663

 
$
—

 
$
—

Short-term investments
139

 
139

 
—

 
—

Net derivative contracts
129

 
—

 
129

 
—

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(122
)
 
—

 
(122
)
 
—

 
 
 
 
 
 
 
 
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 recognized using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $9,073 and fair value of $9,679 at March 31, 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.

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•
Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive loss and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
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 and $84 at March 31, 2015 and December 31, 2014, respectively.
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
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
3,440

 
$
—

 
$
122

 
$
—

 
$
—

 
Fair value
 
2 to 20 years
Currency exchange contracts
412

 
16

 
—

 
8

 
8

 
Cash flow
 
1 to 36 months
Commodity contracts
1

 
—

 
—

 
—

 
—

 
Cash flow
 
1 to 12 months
Total
 
 
$
16

 
$
122

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,313

 
$
52

 
 
 
$
45

 
 
 
 
 
1 to 12 months
Total
 
 
$
52

 
 
 
$
45

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

11
Table of Contents

Amounts recognized in Accumulated other comprehensive loss follow:
 
 
 
Location of gain
 
 
 
Gain recognized in
 
reclassified from
 
Gain reclassified
 
other comprehensive
 
Accumulated other
 
from Accumulated other
 
(loss) income
 
comprehensive loss
 
comprehensive loss
 
Three months ended
March 31
 
 
 
Three months ended
March 31
 
2015
 
2014
 
 
 
2015
 
2014
Derivatives designated as cash
 flow hedges
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
2

 
$
2

 
Cost of products sold
 
$
2

 
$
2

 
 
 
 
 
 
 
 
Amounts recognized in net income follow:
 
 
Three months ended
March 31
 
 
2015
 
2014
Derivatives designated as fair value hedges
 
 
 
 
Fixed-to-floating interest rate swaps
 
$
48

 
$
29

Related long-term debt converted to floating interest
   rates by interest rate swaps
 
(48
)
 
(29
)
 
 
$
—

 
$
—

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

Note 12.
INVENTORY
The components of inventory follow:
 
March 31,
2015
 
December 31,
2014
Raw materials
$
1,088

 
$
924

Work-in-process
295

 
422

Finished goods
1,161

 
1,201

Inventory at FIFO
2,544

 
2,547

Excess of FIFO over LIFO cost
(120
)
 
(119
)
Total inventory
$
2,424

 
$
2,428


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.

12
Table of Contents

 
Three months ended
March 31
 
2015
 
2014
Net sales
 
 
 
Electrical Products
$
1,691

 
$
1,726

Electrical Systems and Services
1,448

 
1,524

Hydraulics
665

 
782

Aerospace
464

 
464

Vehicle
955

 
996

Total net sales
$
5,223

 
$
5,492

 
 
 
 
Segment operating profit
 
 
 
Electrical Products
$
260

 
$
250

Electrical Systems and Services
186

 
169

Hydraulics
66

 
108

Aerospace
77

 
62

Vehicle
164

 
151

Total segment operating profit
753

 
740

 
 
 
 
Corporate
 
 
 
Amortization of intangible assets
(102
)
 
(110
)
Interest expense - net
(57
)
 
(62
)
Pension and other postretirement benefits expense
(28
)
 
(51
)
Other corporate expense - net
(61
)
 
(64
)
Income before income taxes
505

 
453

Income tax expense
38

 
12

Net income
467

 
441

Less net income for noncontrolling interests
(1
)
 
(2
)
Net income attributable to Eaton ordinary shareholders
$
466

 
$
439



13

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 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.
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 2014, 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 MARCH 31, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$
—

 
$
1,702

 
$
1,696

 
$
3,116

 
$
(1,291
)
 
$
5,223

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
—

 
1,310

 
1,295

 
2,277

 
(1,289
)
 
3,593

Selling and administrative expense
2

 
377

 
176

 
360

 
—

 
915

Research and development expense
—

 
71

 
45

 
42

 
—

 
158

Interest expense (income) - net
—

 
54

 
6

 
(5
)
 
2

 
57

Other (income) loss - net
—

 
(5
)
 
(1
)
 
1

 
—

 
(5
)
Equity in earnings of
   subsidiaries, net of tax
(545
)
 
(211
)
 
(713
)
 
(129
)
 
1,598

 
—

Intercompany expense (income) - net
77

 
(41
)
 
271

 
(307
)
 
—

 
—

Income before income taxes
466

 
147


617


877


(1,602
)

505

Income tax (benefit) expense
—

 
(22
)
 
21

 
41

 
(2
)
 
38

Net income
466

 
169


596


836


(1,600
)

467

Less net income for
   noncontrolling interests
—

 
—

 
—

 
(1
)
 
—

 
(1
)
Net income attributable to
   Eaton ordinary shareholders
$
466

 
$
169


$
596


$
835


$
(1,600
)

$
466

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income
$
(634
)
 
$
46

 
$
(620
)
 
$
(746
)
 
$
1,320

 
$
(634
)
Total comprehensive (loss) income attributable to Eaton
  ordinary shareholders
$
(168
)
 
$
215

 
$
(24
)
 
$
89

 
$
(280
)
 
$
(168
)

14

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2014
 
Eaton Corporation plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$
—

 
$
1,667

 
$
1,641

 
$
3,291

 
$
(1,107
)
 
$
5,492

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold
—

 
1,342

 
1,218

 
2,392

 
(1,094
)
 
3,858

Selling and administrative expense
2

 
361

 
200

 
399

 
—

 
962

Research and development expense
—

 
60

 
50

 
52

 
—

 
162

Interest expense (income) - net
—

 
59

 
7

 
(6
)
 
2

 
62

Other expense (income) - net
—

 
5

 
3

 
(13
)
 
—

 
(5
)
Equity in (earnings) loss of
   subsidiaries, net of tax
(469
)
 
7

 
(491
)
 
45

 
908

 
—

Intercompany expense (income) - net
28

 
(70
)
 
132

 
(90
)
 
—

 
—

Income (loss) before income taxes
439

 
(97
)

522


512


(923
)

453

Income tax (benefit) expense
—

 
(14
)
 
(7
)
 
38

 
(5
)
 
12

Net income (loss)
439

 
(83
)

529


474


(918
)

441

Less net income for
   noncontrolling interests
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
439

 
$
(83
)

$
529


$
472


$
(918
)

$
439

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
3

 
$
30

 
$
25

 
$
(46
)
 
$
(9
)
 
$
3

Total comprehensive income (loss) attributable to Eaton
ordinary shareholders
$
442

 
$
(53
)
 
$
554

 
$
426

 
$
(927
)
 
$
442


15

CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 31, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$
7

 
$
36

 
$
257

 
$
363

 
$
—

 
$
663

Short-term investments
—

 
—

 
1

 
138

 
—

 
139

Accounts receivable - net
—

 
557

 
1,013

 
2,163

 
—

 
3,733

Intercompany accounts
   receivable
4

 
557

 
3,835

 
3,390

 
(7,786
)
 
—

Inventory
—

 
384

 
668

 
1,425

 
(53
)
 
2,424

Deferred income taxes
—

 
355

 
134

 
87

 
—

 
576

Prepaid expenses and
   other current assets
—

 
122

 
41

 
248

 
(6
)
 
405

Total current assets
11

 
2,011


5,949


7,814

 
(7,845
)
 
7,940

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net
—

 
966

 
747

 
1,921

 
—

 
3,634

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill
—

 
1,355

 
6,256

 
5,937

 
—

 
13,548

Other intangible assets
—

 
192

 
3,764

 
2,361

 
—

 
6,317

Deferred income taxes
—

 
892

 
2

 
145

 
(819
)
 
220

Investment in subsidiaries
26,508

 
12,410

 
57,827

 
9,184

 
(105,929
)
 
—

Intercompany loans receivable
—

 
7,766

 
2,112

 
41,301

 
(51,179
)
 
—

Other assets
—

 
583

 
132

 
322

 
—

 
1,037

Total assets
$
26,519

 
$
26,175

 
$
76,789

 
$
68,985

 
$
(165,772
)
 
$
32,696

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

 
$
250

 
$
—

 
$
17

 
$
—

 
$
267

Current portion of
   long-term debt
—

 
701

 
542

 
1

 
—

 
1,244

Accounts payable
—

 
493

 
343

 
1,133

 
—

 
1,969

Intercompany accounts payable
59

 
4,022

 
2,706

 
999

 
(7,786
)
 
—

Accrued compensation
—

 
32

 
44

 
206

 
—

 
282

Other current liabilities
7

 
712

 
302

 
907

 
(24
)
 
1,904

Total current liabilities
66

 
6,210

 
3,937

 
3,263

 
(7,810
)
 
5,666

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
—

 
7,122

 
687

 
18

 
2

 
7,829

Pension liabilities
—

 
586

 
138

 
806

 
—

 
1,530

Other postretirement
   benefits liabilities
—

 
280

 
135

 
91

 
—

 
506

Deferred income taxes
—

 
14

 
1,165

 
521

 
(819
)
 
881

Intercompany loans payable
11,243

 
2,768

 
36,310

 
858

 
(51,179
)
 
—

Other noncurrent liabilities
—

 
420

 
181

 
419

 
—

 
1,020

Total noncurrent liabilities
11,243

 
11,190


38,616


2,713


(51,996
)

11,766

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
15,210

 
8,775

 
34,236

 
62,963

 
(105,974
)
 
15,210

Noncontrolling interests
—

 
—

 
—

 
46

 
8

 
54

Total equity
15,210

 
8,775

 
34,236

 
63,009

 
(105,966
)
 
15,264

Total liabilities and equity
$
26,519

 
$
26,175


$
76,789


$
68,985


$
(165,772
)

$
32,696


16

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

 
12,179

 
58,687

 
9,145

 
(106,623
)
 
—

Intercompany loans receivable
—

 
7,542

 
2,249

 
40,635

 
(50,426
)
 
—

Other assets
—

 
533

 
141

 
328

 
—

 
1,002

Total assets
$
26,615

 
$
25,959

 
$
77,507

 
$
70,034

 
$
(166,586
)
 
$
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
—