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Eaton Corp plc - Quarter Report: 2015 March (Form 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.

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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.


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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.

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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

 
475

 
340

 
1,125

 

 
1,940

Intercompany accounts payable
117

 
4,125

 
3,449

 
991

 
(8,682
)
 

Accrued compensation

 
112

 
59

 
249

 

 
420

Other current liabilities
1

 
674

 
340

 
984

 
(14
)
 
1,985

Total current liabilities
118

 
6,088

 
4,492

 
3,353

 
(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

 
8,603

 
34,259

 
63,802

 
(106,664
)
 
15,786

Noncontrolling interests

 

 

 
45

 
8

 
53

Total equity
15,786

 
8,603

 
34,259

 
63,847

 
(106,656
)
 
15,839

Total liabilities and equity
$
26,615

 
$
25,959


$
77,507


$
70,034


$
(166,586
)

$
33,529


17


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash (used in) provided by
   operating activities
$
(82
)
 
$
(187
)
 
$
19

 
$
327

 
$

 
$
77

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

 

 

 
(38
)
 

 
(38
)
Capital expenditures for property,
   plant and equipment

 
(21
)
 
(26
)
 
(58
)
 

 
(105
)
Sales of short-term investments - net

 

 

 
99

 

 
99

Loans to affiliates

 
(154
)
 

 
(3,482
)
 
3,636

 

Repayments of loans from affiliates

 

 
11

 
2,850

 
(2,861
)
 

Other - net

 
(20
)
 
19

 
(8
)
 

 
(9
)
Net cash (used in) provided by
   investing activities

 
(195
)

4


(637
)

775


(53
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 
250

 

 
16

 

 
266

Payments on borrowings

 
(2
)
 

 
(1
)
 

 
(3
)
Proceeds from borrowings from
   affiliates
500

 
2,982

 
153

 
1

 
(3,636
)
 

Payments on borrowings from
   affiliates
(24
)
 
(2,826
)
 

 
(11
)
 
2,861

 

Other intercompany
   financing activities

 
(159
)
 
68

 
91

 

 

Cash dividends paid
(251
)
 

 

 

 

 
(251
)
Exercise of employee stock options
33

 

 

 

 

 
33

Repurchase of shares
(170
)
 

 

 

 

 
(170
)
Other - net

 

 

 
(2
)
 

 
(2
)
Net cash provided by (used in)
   financing activities
88

 
245


221


94


(775
)

(127
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(15
)
 

 
(15
)
Total increase (decrease) in cash
6

 
(137
)

244


(231
)



(118
)
Cash at the beginning of the period
1

 
173

 
13

 
594

 

 
781

Cash at the end of the period
$
7

 
$
36


$
257


$
363


$


$
663


18


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2014
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash (used in) provided by
   operating activities
$
(6
)
 
$
(440
)
 
$
182

 
$
276

 
$

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(25
)
 
(29
)
 
(56
)
 

 
(110
)
Sales of short-term investments - net

 

 
98

 
333

 

 
431

Loans to affiliates

 
(7
)
 

 
(1,056
)
 
1,063

 

Repayments of loans from affiliates

 
171

 

 
814

 
(985
)
 

Proceeds from sale of business

 

 

 
3

 

 
3

Other - net

 
(13
)
 
(1
)
 
(6
)
 

 
(20
)
Net cash provided by
   investing activities

 
126


68


32


78


304

 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Payments on borrowings

 
(251
)
 

 
(6
)
 

 
(257
)
Proceeds from borrowings from
   affiliates

 
946

 
110

 
7

 
(1,063
)
 

Payments on borrowings from
   affiliates

 
(510
)
 
(304
)
 
(171
)
 
985

 

Other intercompany
   financing activities
217

 
104

 
(54
)
 
(267
)
 

 

Cash dividends paid
(229
)
 

 

 

 

 
(229
)
Exercise of employee stock options
23

 

 

 

 

 
23

Excess tax benefit from
   equity-based compensation

 
20

 

 

 

 
20

Net cash provided by (used in)
   financing activities
11

 
309


(248
)

(437
)

(78
)

(443
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(4
)
 

 
(4
)
Total increase (decrease) in cash
5

 
(5
)

2


(133
)



(131
)
Cash at the beginning of the period
3

 
51

 
10

 
851

 

 
915

Cash at the end of the period
$
8

 
$
46


$
12


$
718


$


$
784



19

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 102,000 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
March 31
 
 
2015
 
2014
Net sales
 
$
5,223

 
$
5,492

Net income attributable to Eaton ordinary shareholders
 
466

 
439

Net income per ordinary share - diluted
 
$
0.99

 
$
0.92



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 excludes amounts that differ 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. 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.

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Table of Contents

Consolidated Financial Results
 
 
Three months ended
March 31
 
Increase
(decrease)
 
 
2015
 
2014
 
Net sales
 
$
5,223

 
$
5,492

 
(5
)%
Gross profit
 
1,630

 
1,634

 
 %
Percent of net sales
 
31.2
%
 
29.8
%
 
 
Income before income taxes
 
505

 
453

 
11
 %
Net income
 
$
467

 
$
441

 
6
 %
Less net income for noncontrolling interests
 
(1
)
 
(2
)
 
 
Net income attributable to Eaton
   ordinary shareholders
 
466

 
439

 
6
 %
Excluding acquisition integration charges (after-tax)
 
7

 
44

 
 
Operating earnings
 
$
473

 
$
483

 
(2
)%
 
 
 
 
 
 
 
Net income per ordinary share - diluted
 
$
0.99

 
$
0.92

 
8
 %
Excluding per share impact of acquisition
   integration charges costs (after-tax)
 
0.02

 
0.09

 
 
Operating earnings per ordinary share
 
$
1.01

 
$
1.01

 
 %
Net Sales
Net sales in the first quarter of 2015 decreased 5% compared to the first quarter of 2014 due to a decrease of 6% from the impact of currency translation, partially offset by an increase of 1% in organic sales. The increase in organic sales is primarily due to growth in the Company's end markets, particularly in North America.
Gross Profit
The gross profit margin increased from 29.8% in the first quarter of 2014 to 31.2% in the first quarter of 2015. The increase in the gross profit margin in the first quarter of 2015 was primarily due to higher organic sales volumes, as noted above, and actions taken over the last year to realize greater efficiencies.
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.
Operating Earnings
Operating earnings, a non-GAAP measure discussed on page 20, of $473 in the first quarter of 2015 decreased 2% compared to operating earnings of $483 in the first quarter of 2014. Operating earnings per ordinary share of $1.01 in the first quarter of 2015 were flat with the first quarter of 2014, primarily due to the negative impact from lower currency translation and a higher tax rate, offset by lower pension benefits expense and the impact of share repurchases over the last year.
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.

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Table of Contents

Electrical Products
 
Three months ended
March 31
 
Increase (decrease)
 
2015
 
2014
 
Net sales
$
1,691

 
$
1,726

 
(2
)%
 
 
 
 
 
 
Operating profit
$
260

 
$
250

 
4
 %
Operating margin
15.4
%
 
14.5
%
 
 
 
 
 
 
 
 
Acquisition integration charges
$
6

 
$
29

 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
Operating profit
$
266

 
$
279

 
(5
)%
Operating margin
15.7
%
 
16.2
%
 
 
Net sales decreased 2% in the first quarter of 2015 compared to the first quarter of 2014 due to a decrease of 6% from the impact of currency translation, partially offset by an increase in organic sales of 4%. Organic sales growth in the first quarter of 2015 was due to strength in North American markets.
Operating margin before acquisition integration charges decreased from 16.2% in the first quarter of 2014 to 15.7% in the first quarter of 2015. The decrease in operating margin in the first quarter of 2015 was primarily due to unfavorable mix and the impact of exchange on sales to Canada.
Electrical Systems and Services
 
Three months ended
March 31
 
Increase (decrease)
 
2015
 
2014
 
Net sales
$
1,448

 
$
1,524

 
(5
)%
 
 
 
 
 
 
Operating profit
$
186

 
$
169

 
10
 %
Operating margin
12.8
%
 
11.1
%
 
 
 
 
 
 
 
 
Acquisition integration charges
$
3

 
$
26

 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
Operating profit
$
189

 
$
195

 
(3
)%
Operating margin
13.1
%
 
12.8
%
 
 
Net sales decreased 5% in the first quarter of 2015 compared to the first quarter of 2014 due to a decrease of 4% from the impact of currency translation and a decrease in organic sales of 1%. The organic sales decline during the first quarter of 2015 was primarily due to a decline in large projects in the Americas. 
Operating margin before acquisition integration charges increased from 12.8% in the first quarter of 2014 to 13.1% in the first quarter of 2015. The increase in operating margin in the first quarter of 2015 was primarily due to operational efficiency improvements.

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Table of Contents

Hydraulics
 
Three months ended
March 31
 
Decrease
 
2015
 
2014
 
Net sales
$
665

 
$
782

 
(15
)%
 
 
 
 
 
 
Operating profit
$
66

 
$
108

 
(39
)%
Operating margin
9.9
%
 
13.8
%
 
 
 
 
 
 
 
 
Acquisition integration charges
$
1

 
$
4

 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
Operating profit
$
67

 
$
112

 
(40
)%
Operating margin
10.1
%
 
14.3
%
 
 
Net sales decreased 15% in the first quarter of 2015 compared to the first quarter of 2014 due to a decrease of organic sales of 9% and a decrease of 6% from the impact of currency translation. The decrease in organic sales in the first quarter of 2015 was primarily due to weakness in the global agricultural equipment market and the China construction equipment market.
Operating margin before acquisition integration charges decreased from 14.3% in the first quarter of 2014 to 10.1% in the first quarter of 2015. The decrease in operating margin in the first quarter of 2015 was primarily due to lower sales volumes, as noted above, unfavorable mix, and the cost of restructuring initiatives.
Aerospace
 
Three months ended
March 31
 
Increase
 
2015
 
2014
 
Net sales
$
464

 
$
464

 
%
 
 
 
 
 
 
Operating profit
$
77

 
$
62

 
24
%
Operating margin
16.6
%
 
13.4
%
 
 
Net sales in the first quarter of 2015 were the same as the first quarter of 2014, reflecting an increase in organic sales of 8%, offset by a decrease of 5% from the divestiture of Eaton's Aerospace Power Distribution Management Solutions and Integrated Cockpit Solutions businesses in 2014 and a decrease of 3% from the impact of currency translation. The increase in organic sales in the first quarter of 2015 was primarily due to higher after-market sales and continued strength in commercial OEM markets.
Operating margin increased from 13.4% in the first quarter of 2014 to 16.6% in the first quarter of 2015. The increase in operating margin in the first quarter of 2015 was primarily due to higher organic sales volumes, as noted above, and favorable mix.
Vehicle
 
Three months ended
March 31
 
Increase (decrease)
 
2015
 
2014
 
Net sales
$
955

 
$
996

 
(4
)%
 
 
 
 
 
 
Operating profit
$
164

 
$
151

 
9
 %
Operating margin
17.2
%
 
15.2
%
 
 
Net sales decreased 4% in the first quarter of 2015 compared to the first quarter of 2014 due to a decrease of 8% from the impact of currency translation, partially offset by an increase in organic sales of 4%. The increase in organic sales in the first quarter of 2015 was primarily due to improved demand in the North American truck and automotive markets, partially offset by weakness in South American markets.

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Table of Contents

Operating margin increased from 15.2% in the first quarter of 2014 to 17.2% in the first quarter of 2015. The increase in operating margin in the first quarter of 2015 was primarily due to higher organic sales, as noted above, and the favorable impact of certain restructuring activities taken in 2014 to generate ongoing efficiencies.
Corporate Expense
 
Three months ended
March 31
 
Decrease
 
2015
 
2014
 
Amortization of intangible assets
102

 
110

 
(7
)%
Interest expense - net
57

 
62

 
(8
)%
Pension and other postretirement
   benefits expense
28

 
51

 
(45
)%
Other corporate expense - net
61

 
64

 
(5
)%
Total corporate expense
$
248

 
$
287

 
(14
)%
Total Corporate expense decreased 14% from $287 in the first quarter of 2014 to $248 in the first quarter of 2015 primarily due to lower Pension and other postretirement benefits expense related to lower lump sum settlements in the first quarter of 2015. Higher settlement expense in the first quarter of 2014 was related to the expiry of restrictions on lump sum settlements.

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 March 31, 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 it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business as well as scheduled payments of long-term debt.
Eaton was in compliance with each of its debt covenants for all periods presented.
Sources and Uses of Cash Flow
Operating Cash Flow
Net cash provided by operating activities was $77 in the first three months of 2015, an increase of $65 compared to $12 in the first three months of 2014. The increase in net cash provided by operating activities was primarily due to a decrease in contributions of $52 in pension and other postretirement benefit plans, which totaled $232 in the first three months of 2015 compared to $284 in 2014.
Investing Cash Flow
Net cash used in investing activities was $53 in the first three months of 2015, a decrease $357 compared to net cash provided by investing activities of $304 in the first three months of 2014. The decline in investing cash flows was primarily the result of a decrease in sales of short-term investments of $332 and an increase in cash paid for acquisitions of businesses of $38 during 2015.
Financing Cash Flow
Net cash used in financing activities was $127 in the first three months of 2015, a decrease of $316 in the use of cash compared to $443 in the first three months of 2014. The lower use of cash was primarily due to an increase in proceeds from borrowings, which totaled $266 in the first three months of 2015 compared to $0 in 2014. In addition, payments on borrowings totaled $3 in the first three months of 2015 compared to $257 in 2014. Financing cash inflows were offset with $170 of share repurchases during the first three months of 2015 compared to $0 in 2014 and dividends increased $22 to $251 in 2015 compared to $229 in 2014.



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Table of Contents

FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning litigation developments, capital expenditures and restructuring charges, amount 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; 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.

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 March 31, 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 first 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.



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Table of Contents

PART II — OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 6 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 first quarter of 2015, 2.4 million ordinary shares were repurchased in the open market at a total cost of $170 million. These shares were repurchased under the program announced and approved by shareholders on April 24, 2013 and on April 23, 2014, and approved by the Board of Directors on October 22, 2013. A summary of the shares repurchased in the first 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
February
 
1,890,821

 
$
71.45

 
1,890,821

 
28,550,017

March
 
518,200

 
$
67.52

 
518,200

 
28,031,817

Total
 
2,409,021

 
$
70.60

 
2,409,021

 
 

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:
April 29, 2015
By:
/s/ Richard H. Fearon
 
 
 
 
Richard H. Fearon
 
 
 
 
Principal Financial Officer
 
 
 
(On behalf of the registrant and as Principal Financial Officer)
 
 
 
 
 


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Table of Contents

Eaton Corporation plc
First 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 *
 
 
 
101.INS
 
XBRL Instance Document *
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document *
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document *
 
 
 
101.DEF
 
XBRL Taxonomy Extension Label Definition Document *
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document *
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document *
_______________________________
*
 
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended March 31, 2015 and 2014, (ii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014, (iii) Condensed Consolidated Balance Sheets at March 31, 2015 and December 31, 2014, (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 and (v) Notes to Condensed Consolidated Financial Statements for the three months ended March 31, 2015.


28