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Eaton Corp plc - Annual Report: 2021 (Form 10-K)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the year ended December 31, 2021
Commission file number 000-54863
EATON CORPORATION plc
(Exact name of registrant as specified in its charter)
Ireland98-1059235
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification Number)
 
Eaton House, 30 Pembroke Road,Dublin 4,IrelandD04 Y0C2
(Address of principal executive offices)(Zip Code)
+3531637 2900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Ordinary shares ($0.01 par value)ETNNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☑ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☑ Accelerated filer☐ Non-accelerated filer ☐
Smaller reporting company☐ Emerging growth company☐ 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑
The aggregate market value of Ordinary Shares held by non-affiliates of the registrant as of June 30, 2021 was $59.1 billion.
As of January 31, 2022, there were 398.8 million Ordinary Shares outstanding.
Documents Incorporated By Reference
Portions of the Proxy Statement for the 2022 annual shareholders meeting are incorporated by reference into Part III.

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TABLE OF CONTENTS


Table of contents
Part I

Item 1. Business.
Eaton Corporation plc (Eaton or the Company) is an intelligent power management company dedicated to improving the quality of life and protecting the environment for people everywhere. We are guided by our commitment to do business right, to operate sustainably and to help our customers manage power – today and well into the future. By capitalizing on the global growth trends of electrification and digitalization, we're accelerating the planet's transition to renewable energy, helping to solve the world's most urgent power management challenges, and doing what's best for our stakeholders and all of society.
Founded in 1911, Eaton has been listed on the New York Stock Exchange for nearly a century. We reported revenues of $19.6 billion in 2021 and serve customers in more than 170 countries.
Eaton electronically files or furnishes reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) to the United States Securities and Exchange Commission (SEC), including annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and proxy and information statements, as well as any amendments to those reports. As soon as reasonably practicable, these reports are available free of charge through the Company's website at www.eaton.com. These filings are also accessible on the SEC's website at www.sec.gov.
COVID-19
Information related to the impact of the COVID-19 pandemic on the Company is presented in “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
Acquisitions and Divestitures of Businesses
Information regarding the Company's acquisitions and divestitures is presented in Note 2 of the Notes to the Consolidated Financial Statements.
Business Segment Information
Information by business segment regarding principal products, principal markets, methods of distribution and net sales is presented in Note 17 of the Notes to the Consolidated Financial Statements. Additional information regarding Eaton's segments and business is presented below.
Electrical Americas and Electrical Global
Principal methods of competition in these segments are performance of products and systems, technology, customer service and support, and price. Eaton has a strong competitive position in these segments and, with respect to many products, is considered among the market leaders. In normal economic cycles, sales of these segments are historically lower in the first quarter and higher in the third and fourth quarters of a year. In 2021, 22% of these segments' sales were made to seven large customers of electrical products and electrical systems and services.
Hydraulics
On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S, a Danish industrial company. Prior to the sale, the Hydraulics business was a reportable operating segment.
Aerospace
Principal methods of competition in this segment are total cost of ownership, product and system performance, quality, design engineering capabilities, and timely delivery. Eaton has a strong competitive position in this segment and, with respect to many products and platforms, is considered among the market leaders. In 2021, 20% of this segment's sales were made to three large original equipment manufacturers of aircraft.
Vehicle
Principal methods of competition in this segment are product performance, technology, global service, and price. Eaton has a strong competitive position in this segment and, with respect to many products, is considered among the market leaders. In 2021, 36% of this segment's sales were made to four large original equipment manufacturers of vehicles and related components.
eMobility
Principal methods of competition in this segment are product performance, technology, global service, and price. Eaton has a strong competitive position in this segment. In 2021, 18% of this segment's sales were made to three large original equipment manufacturers of vehicles, construction equipment and related components.
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Information Concerning Eaton's Business in General
Raw Materials
Eaton's major requirements for raw materials include iron, steel, copper, nickel, aluminum, lead, silver, gold, titanium, rubber, plastic, electronic components, chemicals, and fluids. Materials are purchased in various forms, such as bar stock, extrusions, castings, forgings, powder metal, coils, sheets, strips, stampings, plastic resins and pellets. Raw materials, as well as parts and other components, are purchased from many suppliers. Under normal circumstances, the Company has no difficulty obtaining its raw materials. However, as global economies recovered from the COVID-19 pandemic in 2021, some of our businesses were impacted by inflation and supply chain constraints, including limited availability of select materials and delivery delays. During this time, we worked closely with our suppliers to manage and minimize the impact on our supply chain. Additional information related to the impact of supply chain constraints and inflation is presented in “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.
Patents and Trademarks
Eaton considers its intellectual property, including without limitation patents, trade names, domain names, trademarks, confidential information, and trade secrets to be of significant value to its business as a whole. The Company's products are manufactured, marketed and sold using a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire in the future. Eaton develops and acquires new intellectual property on an ongoing basis and considers all of its intellectual property to be valuable. Based on the broad scope of the Company's product lines, management believes that the loss or expiration of any single intellectual property right would not have a material effect on Eaton's consolidated financial statements or its business segments. The Company's policy is to file applications and obtain patents for the majority of its novel and innovative new products including product modifications and improvements.
Environmental Contingencies
Our comprehensive sustainability strategy is driven by our mission to improve the quality of life and the environment. We are committed to reducing our footprint, eliminating waste, and making the best use of natural resources. Operations of the Company involve the use and disposal of certain substances regulated under environmental protection laws. Eaton continues to modify processes on an ongoing, regular basis in order to reduce the impact on the environment, including the reduction or elimination of certain chemicals used in, and wastes generated from, operations. Compliance with laws that have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, are not expected to have a material adverse effect upon capital expenditures, including expenditures for environmental control facilities, earnings or the competitive position of the Company. Compliance with future environmental protection laws may require an increase in capital expenditures. Information regarding the Company's liabilities related to environmental matters is presented in Note 10 of the Notes to the Consolidated Financial Statements.
Human Capital Management
Eaton has approximately 86,000 employees globally. The number of persons employed by our reportable segments and corporate at December 31, 2021 are as follows:
(In thousands)2021
Electrical Americas
28 
Electrical Global26 
Aerospace12 
Vehicle11 
eMobility1 
Corporate8 
Total number of persons employed 86 
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Eaton uses and monitors a variety of metrics to ensure our objectives related to employee attraction, development, and retention are met. Most notably, Eaton tracks the following:
Inclusion and Diversity
Eaton is committed to having a workforce that is diverse and inclusive at all levels, reflecting the diversity of our customers and communities. Our success depends on our ability to attract and retain the best employees without regard to race, color, social or economic status, religion, national origin, marital status, age, veteran status, sexual orientation, gender identity, or any protected status. It is the policy of the Company to make all decisions regarding employment, including hiring, compensation, training, promotions, transfers, or lay-offs, based on the principle of equal employment opportunity and without discrimination.
At December 31, 2021, Eaton’s distribution by gender, and United States distribution by minority status, is as follows:

Total GlobalNumber of women
(Global)		Percentage of women
(Global)		U.S. total
Number of minorities (U.S. only)1
Percentage of minorities (U.S. only)1
Board of directors
12 4 33.3 %10 4 40.0 %
Global leadership team25 6 24.0 %23 13 56.5 %
Executives587 137 23.3 %413 70 16.9 %
Managers7,185 1,697 23.6 %3,668 731 19.9 %
All other employees78,150 26,827 34.3 %20,171 7,340 36.4 %
All employees85,947 28,667 33.4 %24,275 8,154 33.6 %
1 Excluding Puerto Rico
At Eaton, one of our aspirational goals is to be a model of inclusion and diversity among our peers. Our plan to achieve this goal encompasses a number of actions, including an examination into our programs, practices, processes, and policies to look for opportunities to strengthen our support of underrepresented individuals, groups and businesses across our operations.
Compensation
A key component of Eaton’s attraction and retention strategy is competitive compensation. Eaton regularly benchmarks its compensation practices with industry peers to maintain a top performing workforce. Eaton’s 2021 total employee costs was $5.5 billion including salaries, wages, equity-based compensation, pension and other benefits. The total compensation of our median employee on October 1, 2020, as reported in our 2021 Proxy Statement filed in March 2021, and as calculated in accordance with Item 402(u) of Regulation S-K, was $63,951.
Safety
Throughout our operations, our goal is to have no safety incidents and we continue to make progress towards that goal. For example, in 2020 we reduced our Total Recordable Case Rate (TRCR) by 26% (0.40) and our Days Away Case Rate (DACR) by 26% (0.17) compared to 2019. Our TRCR of 0.40 approaches our long-term goal of 0.25, which we believe is a world-class safety rate.
Further, in 2021, the Company took a number of measures to continue to protect our workforce from the COVID-19 pandemic, including the following as appropriate:
•Training our employees at sites around the world in cleaning and disinfecting protocols
•Enacting social distancing procedures, staggered shifts, a rotating office work schedule, and modified workspace and meeting space layouts as appropriate
•Requiring employees to stay at home if they are feeling ill, and encouraging increased hand washing and hygiene practices across all sites
•Advising employees to take advantage of flexible work options
•Restricting visitors to all sites
•Encouraging vaccination for all employees and at select locations, arranging for vaccination clinics and transportation
•Consulting regularly with doctors and health care organizations
•Updating the Company's response plan as new information became available
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In the event an employee suspects they have been exposed to COVID-19, or testing confirms it, sites will implement a response plan that includes:
•Communication with all who may have been exposed
•Disinfecting work stations and common areas
•Shutting down the facility if warranted
These actions are aligned with preventive health protocols of governmental authorities and health organizations including the Centers for Disease Control (U.S.) and the World Health Organization.
Achieving work-life balance
Achieving work-life balance is a common concern of today's employees. Flexible work solutions and inclusive programs will help us remain competitive in attracting and retaining the best talent and make it possible for employees in varied situations to be able to remain at Eaton. Flexible solutions include compressed work weeks, remote working, job sharing, part-time work, flextime, and telework.
Engagement
Fully engaged employees are more productive, innovative, and satisfied in their work. Examples of how we engage our employees include enterprise-wide town halls, hosting informal listening meetings and surveying groups of employees on specific subjects. In addition, we have programs focused on career development of employees at all levels. Our 2021 survey on employee engagement showed a favorable response from 83 percent of employees who completed it. This group reported that they were proud to work at Eaton, felt personal accomplishment from their work, and would recommend Eaton as a place to work. We are committed to a wide range of strategies designed to improve and sustain employee engagement over the long-term.
Item 1A. Risk Factors.
Among the risks that could materially adversely affect Eaton's businesses, financial condition or results of operations are the following:
Operational Risks
Impacts related to, and recovery from, the COVID-19 pandemic could have an adverse effect on our business and results of operations.
The global outbreak of COVID-19 has disrupted economic activity around the world. As a result, we and our employees, suppliers, customers and others have been and may continue to be restricted or prevented from conducting normal business activities, including as a result of shutdowns, travel restrictions and other actions that may be requested or mandated by governmental authorities. While a substantial portion of our businesses and facilities have been classified as essential in jurisdictions in which facility closures have been mandated, we can give no assurance that there will not be additional closures in the future or that our businesses and facilities will be classified as essential in each of the jurisdictions in which we operate. We have experienced and could continue to experience supply and labor shortages as the Company expands its production capacity to meet increased customer demand as global economies recover. The extent to which the COVID-19 pandemic continues to impact our results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including the resurgence of COVID-19 as a result of new variants, the effectiveness of COVID-19 vaccines and the speed at which populations are vaccinated around the globe, the impact of COVID-19 on economic activity and regulatory actions taken to contain the impact of COVID-19 on public health and the global economy. The impact of COVID-19 may also exacerbate other risks discussed in Item 1A of this Annual Report on Form 10-K, any of which could have a material effect on our results of operations.
If Eaton is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, product or service offerings could be compromised or operations could be disrupted or data confidentiality impaired.
Eaton relies on information technology networks and systems, including the Internet, to process, transmit and store electronic information, and to manage or support a variety of business processes and activities, including procurement, manufacturing, distribution, invoicing and collection. Additionally, many of our products and services include integrated software and information technology that collects data or connects to external and internal systems. Because of this, cybersecurity threats pose a material risk to our business operations.
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Global cybersecurity threats range from widespread vulnerabilities, sophisticated and targeted measures known as advanced persistent threats, or uncoordinated individual attempts to gain unauthorized access to IT/OT systems. These threats may be directed at Eaton, its products, software embedded in Eaton’s products, or its third-party service providers. The risk is amplified by the increasingly connected nature of our products and systems. These threats may originate from anywhere in the connected world and take the form of phishing, malware, bots, or human-centric attacks. Eaton continually seeks to deploy comprehensive measures to deter, prevent, detect, respond to and mitigate these threats.
As a result of our worldwide operations, we are subject to laws and regulations, including data protection/privacy and cybersecurity laws and regulations, in many jurisdictions. In addition, we operate in an environment in which there are different and potentially conflicting data privacy laws in effect in the various U.S. states and foreign jurisdictions in which we operate and we must understand and comply with each law and standard in each of these jurisdictions while ensuring the data is secure. For example, the Global Data Protection Regulation (GDPR) prefers that we manage personal data in the E.U. and may impose fines of up to four percent of our global revenue in the event of certain violations.
Eaton’s customers, including Governmental Agencies, are increasingly requiring cybersecurity protections and mandating cybersecurity standards which may result in additional operating or production costs. Our cybersecurity program aligns with well-known industry-wide security control frameworks. Despite these efforts, cybersecurity incidents could potentially result in the misappropriation, destruction, corruption or unavailability of critical data and confidential or proprietary information and the disruption of business operations. The potential consequences of a material cybersecurity incident include theft of intellectual property, disruption of operations, reputational damage, adverse health and safety consequences, the loss or misuse of confidential information, product failure, as well as exposure to fines, legal claims or enforcement actions.
The effects of climate change, including weather disruptions and regulatory/market reactions, create uncertainties that could negatively impact our business.
Global increases in greenhouse gas emissions are linked to climate change, and there is a growing consensus that dramatic emissions reductions are needed to avoid severe climate impacts. Extreme weather events linked to climate change, including hurricanes, flooding, wildfires, and high heat/water scarcity, create physical risks to Eaton’s operating locations and supply chains. While Eaton is working to make its own operations carbon neutral by 2030, a global failure to achieve commitments could cause increases in these extreme weather events, political instability, and workforce migration, ultimately increasing Eaton’s cost of doing business.
Regulatory reactions to climate change may pose more stringent obligations on Eaton’s operations and change customer demands. While Eaton is already gearing its portfolio towards products that will reduce carbon and combat climate change, there is a risk that Eaton may not innovate quickly enough to meet changing regulatory or market demands. Increasing demands for metals as the world electrifies may lead to scarcity and increased costs, as may uncertainty over carbon taxes and grid stability during a renewables transition. Despite these uncertainties, we believe Eaton is well positioned to capitalize on secular trends and market opportunities arising from these risks.
Eaton's operations depend on production facilities throughout the world, which subjects them to varying degrees of risk of disrupted production.
Eaton manages businesses with manufacturing facilities worldwide. The Company's manufacturing facilities and operations could be disrupted by a natural disaster, labor strike, war, political unrest, terrorist activity, economic upheaval, or public health concerns such as the spread of COVID-19. Any such disruption could cause delays in shipments of products and the loss of sales and customers, and insurance proceeds may not adequately compensate for losses.
Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases, or supplier insolvencies could increase operating costs and adversely impact the competitive positions of Eaton's products.
Eaton's major requirements for raw materials are described above in Item 1 “Raw Materials”. Shortages have affected the prices Eaton's businesses are charged as global economies recover from the COVID-19 pandemic. If this trend continues, the competitive position of our products and services may be impacted, which could have a material adverse impact on operating results.
Further, some of Eaton's suppliers of component parts have increased their prices in response to increases in costs of raw materials that they use to manufacture component parts, including logistics inflation. Should this trend continue or become more prevalent, the Company may not be able to increase its prices commensurately with its increased costs, adversely affecting operating results.
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Industry and Market Risks
Volatility of end markets that Eaton serves.
Eaton's segment revenues, operating results, and profitability have varied in the past and may vary from quarter to quarter in the future. Profitability can be negatively impacted by volatility in the end markets that Eaton serves. The Company has undertaken measures to reduce the impact of this volatility through diversification of the markets it serves and expansion of the geographic regions in which it operates. Future downturns in any of the markets could adversely affect revenues, operating results, and profitability.
Eaton's operating results depend in part on continued successful research, development, and marketing of new and/or improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new products and services or maintain its present market positions.
The success of new and improved products and services depends on their initial and continued acceptance by Eaton's customers. The Company's businesses are affected, to varying degrees, by technological change and corresponding shifts in customer demand, which could result in unpredictable product transitions or shortened life cycles. Eaton may experience difficulties or delays in the research, development, production, or marketing of new products and services which may prevent Eaton from recouping or realizing a return on the investments required to bring new products and services to market. The Company's market positions may also be impacted by new entrants into Eaton's product or regional markets.
Legal and Regulatory Risks
Eaton's global operations subject it to economic risk as Eaton's results of operations may be adversely affected by changes in government legislation, regulations and policies, or currency fluctuations.
Operating globally subjects Eaton to changes in government regulations and policies in a large number of jurisdictions around the world, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, data privacy, and exchange controls. Changes in the relative values of currencies occur from time to time and could affect Eaton's operating results. While the Company monitors exchange rate exposures and attempts to reduce these exposures through hedging activities, these risks could adversely affect operating results.
Further, existing free trade laws and regulations provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where we manufacture products, could have an impact on our business and financial results.
Eaton may be subject to risks relating to changes in its tax rates or exposure to additional income tax liabilities.
Eaton is subject to income taxes in many jurisdictions around the world. Income tax liabilities are subject to the allocation of income among various tax jurisdictions. The Company's effective tax rate could be affected materially by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, or changes in tax legislation, regulations, and policies. The amount of income taxes paid is subject to ongoing audits by tax authorities in the countries in which Eaton operates. If these audits result in assessments different from amounts reserved, future financial results may include material unfavorable adjustments to the Company's tax liabilities.
Eaton may be unable to adequately protect its intellectual property rights, which could affect the Company's ability to compete.
Protecting Eaton's intellectual property rights is critical to its ability to compete and succeed. The Company owns a large number of patents and patent applications worldwide, as well as trademark and copyright registrations that are necessary, and contribute significantly, to the preservation of Eaton's competitive position in various markets. Although management believes that the loss or expiration of any single intellectual property right would not have a material effect on the results of operations or financial position of Eaton or its business segments, there can be no assurance that any one, or more, of these patents and other intellectual property will not be challenged, invalidated, or circumvented by third parties. Eaton enters into confidentiality and invention assignment agreements with the Company's employees, and into non-disclosure agreements with suppliers and appropriate customers, so as to limit access to and disclosure of proprietary information. These measures may not suffice to deter misappropriation or independent third party development of similar technologies.
Eaton is subject to litigation and environmental regulations that could adversely impact Eaton's businesses.
At any given time, Eaton may be subject to litigation, the disposition of which may have a material adverse effect on the Company's businesses, financial condition or results of operations. Information regarding current legal proceedings is presented in Note 10 and Note 11 of the Notes to the Consolidated Financial Statements.

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Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Eaton's principal executive offices are located at Eaton House, 30 Pembroke Road, Dublin 4, Ireland D04 Y0C2. The Company maintains manufacturing facilities at approximately 224 locations in 36 countries. The Company is a lessee under a number of operating leases for certain real properties and equipment, none of which is material to its operations. Management believes that the existing manufacturing facilities are adequate for its operations and that the facilities are maintained in good condition.
Item 3. Legal Proceedings.
Information regarding the Company's current legal proceedings is presented in Note 10 and Note 11 of the Notes to the Consolidated Financial Statements.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 4A. Information about our Executive Officers
A listing of executive officers, their ages, positions and offices held over the past five years, as of February 1, 2022, is as follows:
NameAgePosition (Date elected to position)
Craig Arnold61Chairman of Eaton Corporation plc (June 1, 2016 - present)
Chief Executive Officer of Eaton Corporation (June 1, 2016 - present)
Director of Eaton Corporation plc (September 1, 2015 - present)
President and Chief Operating Officer of Eaton Corporation
(September 1, 2015 - May 31, 2016)
Thomas B. Okray59Executive Vice President and Chief Financial Officer of Eaton Corporation
(March 2021 - present)
Executive Vice President and Chief Financial Officer-Elect of Eaton Corporation
(January 2021 - March 2021)
Senior Vice President and Chief Financial Officer of W.W. Grainger, Inc.
(April 2018 - December 2020)
Executive Vice President and Chief Financial Officer of Advance Auto Parts, Inc.
(October 2016 - April 2018)
Vice President, Finance, Global Customer Fulfillment of Amazon.com, Inc.
(July 2015 - September 2016)
Uday Yadav58President and Chief Operating Officer - Electrical Sector of Eaton Corporation
(July 1, 2019 - present)
Chief Operating Officer - Industrial Sector of Eaton Corporation
(September 1, 2015 - June 30, 2019)
Heath B. Monesmith51President and Chief Operating Officer - Industrial Sector of Eaton Corporation
(July 1, 2019 - present)
Executive Vice President and General Counsel of Eaton Corporation
(March 1, 2017 - January 6, 2020)
Senior Vice President and Deputy General Counsel of Eaton Corporation
(May 15, 2015 - March 1, 2017)
April Miller Boise53Executive Vice President, Chief Legal Officer and Secretary of Eaton Corporation
(January 6, 2020 - present)
Senior Vice President, Chief Legal Officer and Corporate Secretary of Meritor, Inc.
(August 15, 2016 - December 13, 2019)
Senior Vice President, General Counsel, Head of Global Mergers and Acquisitions,
and Corporate Secretary of Avintiv, Inc. (March 23, 2015 - December 31, 2015)
Ernest W. Marshall, Jr.53Executive Vice President and Chief Human Resources Officer of Eaton Corporation
(July 1, 2018 - present)
Vice President - Human Resources, Aviation Division of General Electric
(August 1, 2013 - June 30, 2018)
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Daniel Hopgood50Senior Vice President and Controller of Eaton Corporation (April 1, 2021 - present)
Senior Vice President Global Financial Services and Systems of Eaton Corporation
(September 2017 - March 30, 2021)
Senior Vice President, Finance and Planning, Industrial Sector of Eaton Corporation
(September 2013 - September 2017)
Joao V. Faria57President - Vehicle Group of Eaton Corporation (May 1, 2017 - present)
Vice President and General Manager, Latin America, Electrical Sector and
President, Latin America (August 1, 2013 - April 30, 2017)
Nandakumar Cheruvatath60President - Aerospace Group of Eaton Corporation (September 1, 2015 - present)
Brian S. Brickhouse58President - Americas Region, Electrical Sector of Eaton Corporation
(July 1, 2019 - present)
President - Electrical Systems and Services Group of Eaton Corporation
(July 1, 2018 - June 30, 2019)
President, Asia Pacific Region, Electrical (May 15, 2015 - June 30, 2018)
There are no family relationships among the officers listed, and there are no arrangements or understandings pursuant to which any of them were elected as officers. All officers hold office for one year and until their successors are elected and qualified, unless otherwise specified by the Board of Directors; provided, however, that any officer is subject to removal with or without cause, at any time, by a vote of a majority of the Board of Directors.

Part II

Item 5. Market for the Registrant's Ordinary Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
The Company's ordinary shares are listed for trading on the New York Stock Exchange under the symbol ETN. At December 31, 2021, there were 10,447 holders of record of the Company's ordinary shares. Additionally, 14,835 current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), the Eaton Personal Investment Plan (EPIP), and the Eaton Puerto Rico Retirement Savings Plan.
Information regarding equity-based compensation plans required by Regulation S-K Item 201(d) is provided in Item 12 of this Form 10-K Report.
Irish Taxes Applicable to Dividends
Irish income tax may arise with respect to dividends paid on Eaton shares. Eaton may be required to deduct Irish dividend withholding tax (“IDWT”, currently at a rate of 25%) from dividends paid to shareholders who are not tax residents of Ireland even though they are not subject to this tax. To claim exemption from IDWT, shareholders can complete certain Irish dividend withholding tax exemption forms or hold their shares in an account through the Depository Trust Company and have on file with their broker or qualifying agent a valid U.S. address on the record date of the dividend.
Eaton shareholders who receive their dividends subject to Irish dividend withholding tax will generally have no further liability for Irish income tax on the dividends unless they are otherwise subject to Irish income tax.

Item 6. [Reserved]

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Information required by this Item is presented in “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Information regarding market risk is presented in “Market Risk Disclosure” of this Form 10-K.
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Item 8. Financial Statements and Supplementary Data.
The reports of the independent registered public accounting firm, consolidated financial statements, and notes to consolidated financial statements are presented in Item 15 of this Form 10-K.

Item 9. Change in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.

Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton's management, including Craig Arnold - Principal Executive Officer; and Thomas B. Okray - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and procedures were effective as of December 31, 2021.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Company 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 Company reports filed under the Exchange Act is accumulated and communicated to management, including the Company's Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
Pursuant to Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations adopted pursuant thereto, Eaton has included a report of management's assessment of the effectiveness of internal control over financial reporting, which is included in Item 15 of this Form 10-K.
“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, 2021 is included in Item 15 of this Form 10-K.
During the fourth quarter of 2021, 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. Management is currently evaluating the impact of the businesses acquired in 2021 on Eaton's internal control over financial reporting.

Item 9B. Other Information.
None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not Applicable.

Part III

Item 10. Directors, Executive Officers and Corporate Governance.
Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.
The Company has adopted a Code of Ethics, which applies to the directors, officers and employees worldwide. This document is available on the Company's website at http://www.eaton.com.
There were no changes during the fourth quarter 2021 to the procedures by which security holders may recommend nominees to the Company's Board of Directors.
Information related to the Audit Committee, and members of the Committee who are financial experts, is set forth under the caption “Board Committees - Audit Committee” in the definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.
Information required with respect to delinquent Section 16(a) reports is set forth under the caption “Delinquent Section 16(a) Reports” in the Company’s definitive Proxy Statement to be filed on or about March 18, 2022 and is incorporated by reference.
11

Item 11. Executive Compensation.
Information required with respect to executive compensation is set forth under the caption “Compensation Discussion and Analysis” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required with respect to securities authorized for issuance under equity-based compensation plans is set forth under the caption “Equity Compensation Plans” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.
Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share Ownership Tables” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.

Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required with respect to certain relationships and related transactions, as well as director independence, is set forth under the caption “Director Independence” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.

Item 14. Principal Accounting Fees and Services.
Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee Report” in the Company's definitive Proxy Statement to be filed on or about March 18, 2022, and is incorporated by reference.

Part IV


Item 15. Exhibits, Financial Statement Schedules.
(a)    (1) The reports of the independent registered public accounting firm, consolidated financial statements and notes to consolidated financial statements are included in Item 8 above:
Reports of Ernst & Young LLP Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Statements of Income - Years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income - Years ended December 31, 2021, 2020 and 2019
Consolidated Balance Sheets - December 31, 2021 and 2020
Consolidated Statements of Cash Flows - Years ended December 31, 2021, 2020 and 2019
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
(2) All other schedules for which provision is made in Regulation S-X of the SEC are not required under the related instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits incorporated by reference to or filed in conjunction with this form 10-K are listed below.
3 (i)
3 (ii)
4.1
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4.2
4.3
4.4
4.5
4.6
4.7
4.8Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its long-term debt other than those set forth in Exhibits (4.2 - 4.7) hereto
10Material contracts
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
(m)
(n)
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(p)
(q)
(r)
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(bb)
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31.1 
31.2 
32.1 
32.2 
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. *
101.SCH XBRL Taxonomy Extension Schema Document *
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB XBRL Taxonomy Extension Label Linkbase Document *
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document *
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*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 years ended December 31, 2021, 2020 and 2019, (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019 (iii) Consolidated Balance Sheets at December 31, 2021 and 2020, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019, (v) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2021, 2020 and 2019 and (vi) Notes to Consolidated Financial Statements for the year ended December 31, 2021.
Item 16. Form 10-K Summary.
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  EATON CORPORATION plc
  Registrant
Date:February 23, 2022By:/s/ Thomas B. Okray
Thomas B. Okray
(On behalf of the registrant and as Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Date: February 23, 2022
SignatureTitle
/s/ Craig Arnold/s/ Thomas B. Okray
Craig ArnoldChairman, Principal Executive Officer; DirectorThomas B. OkrayPrincipal Financial Officer
/s/ Daniel Hopgood*
Daniel HopgoodPrincipal Accounting OfficerChristopher M. ConnorDirector
**
Olivier LeonettiDirectorDeborah L. McCoyDirector
**
Silvio NapoliDirectorGregory R. PageDirector
**
Sandra PianaltoDirectorRobert V. PragadaDirector
**
Lori J. RyerkerkDirectorGerald B. SmithDirector
**
Dorothy C. ThompsonDirectorDarryl L. WilsonDirector
*By/s/ Thomas B. Okray
Thomas B. Okray, Attorney-in-Fact for the officers
and directors signing in the capacities indicated

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of Eaton Corporation plc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Eaton Corporation plc (“the Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
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Unrecognized Income Tax Benefits

Description of the Matter

As discussed in Note 11 to the consolidated financial statements, the Company had gross unrecognized income tax benefits of $1,120 million related to its uncertain tax positions at December 31, 2021. Unrecognized income tax benefits are recorded under the two-step recognition and measurement principles when a tax position does not meet the more likely than not standard, or if a tax position meets the more likely than not standard, but the financial statement tax benefit is reduced as part of the measurement step.

The balance of unrecognized income tax benefits is comprised of uncertain tax positions which meet the more likely than not standard, but the financial statement tax benefit has been reduced as part of measuring the tax position.

Auditing management’s analysis of its uncertain tax positions and resulting unrecognized income tax benefits is complex as each tax position carries unique facts and circumstances that must be evaluated and ultimate resolution is dependent on uncontrollable factors such as the timing of finalizing resolutions of audit disputes through reaching settlement agreements or concluding litigation, or changes in law, and other factors.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of management’s controls related to uncertain tax positions. For example, we tested controls over management’s application of the two-step recognition and measurement principles and management’s review of the inputs and resultant calculations of unrecognized income tax benefits, as well as the identification of uncertain tax positions.

We also evaluated the Company’s assessment of its uncertain tax positions. Our audit procedures included evaluating management’s accounting policies and documentation to assess the appropriateness and consistency of the methods and assumptions used to develop its uncertain tax positions and related unrecognized income tax benefit amounts by jurisdiction. We also tested the completeness and accuracy of the underlying data used by the Company. For example, we compared the unrecognized income tax benefits recorded with similar positions in prior periods and assessed management’s consideration of current tax controversy and litigation and trends in similar positions challenged by tax authorities. We also assessed the historical accuracy of management’s estimates of its unrecognized income tax benefits with the resolution of those positions. In addition, we involved tax subject matter professionals to evaluate the application of relevant tax laws in the Company’s recognition determination. We have also evaluated the Company’s income tax disclosures in relation to these matters.
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Valuation of Customer Relationships Intangible Asset in the Acquisition of Tripp Lite

Description of the Matter

As discussed in Note 2 to the consolidated financial statements, during March 2021, the Company completed the acquisition of Tripp Lite for a total purchase price of approximately $1.65 billion, net of cash received. The acquisition was accounted for using the acquisition method of accounting. The consideration paid in the acquisition must be allocated to the acquired assets and liabilities assumed generally based on their fair value with the excess of the purchase price over those fair values allocated to goodwill. The estimates of the fair value of intangible assets were recorded in 2021 based upon third-party valuations, which resulted in the recognition of intangible assets totaling approximately $604 million, of which approximately $539 million related to customer relationships.

Auditing the Company’s accounting for its acquisition of Tripp Lite was complex because the customer relationships intangible asset recognized was material to the consolidated financial statements and the estimate of fair value involved subjectivity. The subjectivity was primarily due to the sensitivity of the fair value to underlying assumptions about the future performance of the acquired business. The Company used a discounted cash flow model to measure the customer relationships intangible asset. The significant assumptions used to estimate the fair value of the customer relationships intangible asset included the discount rate and certain assumptions that form the basis of the forecasted results (e.g., revenue growth rates and future EBITDA margins). These significant assumptions are forward looking and could be affected by future economic and market conditions.
How We Addressed the Matter in Our Audit
We obtained an understanding, evaluated the design, and tested the operating effectiveness of the Company’s controls over its accounting for the acquisition of Tripp Lite, including recognition and measurement of the intangible assets acquired. For example, we tested controls over the recognition and measurement of the customer relationships intangible asset, including management’s review of the methods and significant assumptions used to develop the fair value estimate.
 
To test the estimated fair value of the customer relationships intangible asset, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, when evaluating the assumptions related to the revenue growth rates and future EBITDA margins, we compared the assumptions to the past performance of Tripp Lite and expected industry trends and considered whether they were consistent with evidence obtained in other areas of the audit. We also performed sensitivity analyses to evaluate the changes in the fair value of the customer relationships intangible asset that would result from changes in the significant assumptions. We involved our EY valuation specialists to assist with our evaluation of the methodology used by the Company and certain significant assumptions included in the fair value estimate.

/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1923.

Cleveland, Ohio
February 23, 2022


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MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS

We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation plc ("Eaton") included herein for the three years ended December 31, 2021. The primary responsibility for the integrity of the financial information included in this annual report rests with management. The financial information included in this annual report has been prepared in accordance with accounting principles generally accepted in the United States based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton's independent registered public accounting firm, on those consolidated financial statements is included herein.
Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful attention is given to selecting, training and developing personnel, to ensure that management's objectives of establishing and maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company's commitment to a high standard of business conduct.
The Board of Directors pursues its responsibility for the quality of Eaton's financial reporting primarily through its Audit Committee, which is composed of six independent directors. The Audit Committee meets regularly with management, the internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and to discuss matters concerning accounting, internal control, audits and financial reporting. The internal auditors and independent registered public accounting firm have full and free access to senior management and the Audit Committee.
/s/ Craig Arnold/s/ Thomas B. Okray/s/ Daniel Hopgood
Principal Executive OfficerPrincipal Financial OfficerPrincipal Accounting Officer
February 23, 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Eaton Corporation plc
Opinion on Internal Control Over Financial Reporting
We have audited Eaton Corporation plc’s (“the Company”) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the entities that were acquired during 2021 (as described in Note 2), which are included in the 2021 consolidated financial statements of the Company and constituted approximately 12% of total assets (inclusive of acquired intangible assets) as of December 31, 2021 and approximately 5% of net sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of the entities that were acquired during 2021.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated February 23, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP

Cleveland, Ohio
February 23, 2022
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MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Eaton Corporation plc ("Eaton") is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)).
Under the supervision and with the participation of Eaton's management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. Our evaluation of internal control over financial reporting did not include the internal controls of the entities that were acquired during 2021 (as described in Note 2), which are included in the 2021 consolidated financial statements and constituted approximately 12% of total assets (inclusive of acquired intangible assets) as of December 31, 2021 and approximately 5% of net sales for the year then ended. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 Framework). Based on this evaluation under the framework referred to above, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2021.
The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021. This report is included herein.
/s/ Craig Arnold/s/ Thomas B. Okray/s/ Daniel Hopgood
Principal Executive OfficerPrincipal Financial OfficerPrincipal Accounting Officer
February 23, 2022

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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31
(In millions except for per share data)202120202019
Net sales$19,628 $17,858 $21,390 
Cost of products sold13,293 12,408 14,338 
Selling and administrative expense3,256 3,075 3,583 
Research and development expense616 551 606 
Interest expense - net144 149 199 
Gain on sale of businesses617 221 — 
Other expense - net40 150 73 
Income before income taxes2,896 1,746 2,591 
Income tax expense750 331 378 
Net income2,146 1,415 2,213 
Less net income for noncontrolling interests(2)(5)(2)
Net income attributable to Eaton ordinary shareholders$2,144 $1,410 $2,211 
Net income per share attributable to Eaton ordinary shareholders
Diluted$5.34 $3.49 $5.25 
Basic5.38 3.51 5.28 
Weighted-average number of ordinary shares outstanding
Diluted401.6 404.0 420.8 
Basic398.7 402.2 419.0 
Cash dividends declared per ordinary share$3.04 $2.92 $2.84 
The accompanying notes are an integral part of the consolidated financial statements.
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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31
(In millions)202120202019
Net income$2,146 $1,415 $2,213 
Less net income for noncontrolling interests(2)(5)(2)
Net income attributable to Eaton ordinary shareholders2,144 1,410 2,211 
Other comprehensive income (loss), net of tax
Currency translation and related hedging instruments30 201 16 
Pensions and other postretirement benefits495 (73)(130)
Cash flow hedges37 (33)(31)
Other comprehensive income (loss) attributable to Eaton
   ordinary shareholders		562 95 (145)
Total comprehensive income attributable to Eaton ordinary shareholders$2,706 $1,505 $2,066 
The accompanying notes are an integral part of the consolidated financial statements.

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EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS
December 31
(In millions)20212020
Assets  
Current assets  
Cash$297 $438 
Short-term investments271 664 
Accounts receivable - net3,297 2,904 
Inventory2,969 2,109 
Assets held for sale— 2,487 
Prepaid expenses and other current assets677 576 
Total current assets7,511 9,178 
Property, plant and equipment
Land and buildings2,227 2,184 
Machinery and equipment5,591 5,404 
Gross property, plant and equipment7,818 7,588 
Accumulated depreciation(4,754)(4,624)
Net property, plant and equipment3,064 2,964 
Other noncurrent assets
Goodwill14,751 12,903 
Other intangible assets5,855 4,175 
Operating lease assets442 428 
Deferred income taxes392 426 
Other assets2,012 1,750 
Total assets$34,027 $31,824 
Liabilities and shareholders’ equity  
Current liabilities  
Short-term debt$13 $1 
Current portion of long-term debt1,735 1,047 
Accounts payable2,797 1,987 
Accrued compensation501 351 
Liabilities held for sale— 468 
Other current liabilities2,166 2,027 
Total current liabilities7,212 5,881 
Noncurrent liabilities  
Long-term debt6,831 7,010 
Pension liabilities872 1,588 
Other postretirement benefits liabilities263 330 
Operating lease liabilities337 326 
Deferred income taxes559 277 
Other noncurrent liabilities1,502 1,439 
Total noncurrent liabilities10,364 10,970 
Shareholders’ equity  
Ordinary shares (398.8 million outstanding in 2021 and 398.1 million in 2020)
4 4 
Capital in excess of par value12,449 12,329 
Retained earnings7,594 6,794 
Accumulated other comprehensive loss(3,633)(4,195)
Shares held in trust(1)(2)
Total Eaton shareholders’ equity16,413 14,930 
Noncontrolling interests38 43 
Total equity16,451 14,973 
Total liabilities and equity$34,027 $31,824 
The accompanying notes are an integral part of the consolidated financial statements.
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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31
(In millions)202120202019
Operating activities  
Net income$2,146 $1,415 $2,213 
Adjustments to reconcile to net cash provided by operating activities  
Depreciation and amortization922 811 884 
Deferred income taxes(111)(86)(71)
Pension and other postretirement benefits expense53 210 157 
Contributions to pension plans(343)(122)(119)
Contributions to other postretirement benefits plans(20)(23)(15)
Loss (gain) on sale of businesses(197)(91)66 
Changes in working capital
Accounts receivable - net(271)219 172 
Inventory(629)371 (60)
Accounts payable832 76 147 
Accrued compensation154 (65)(23)
Accrued income and other taxes(317)(95)16 
Other current assets(116)(67)12 
Other current liabilities38 196 (21)
Other - net22 195 93 
Net cash provided by operating activities2,163 2,944 3,451 
Investing activities  
Capital expenditures for property, plant and equipment(575)(389)(587)
Cash paid for acquisitions of businesses, net of cash acquired(4,500)(200)(1,180)
Proceeds from (payments for) sales of businesses, net of cash sold3,129 1,408 (36)
Investments in associate companies(124)(19)(11)
Sales (purchases) of short-term investments - net379 (441)(70)
Proceeds from (payments for) settlement of currency exchange contracts not designated as
 hedges - net
(27)94 54 
Other - net(46)(56)(36)
Net cash provided by (used in) investing activities(1,764)397 (1,866)
Financing activities  
Proceeds from borrowings1,798 — 1,232 
Payments on borrowings(1,013)(249)(348)
Short-term debt, net20 (254)(159)
Cash dividends paid(1,219)(1,175)(1,201)
Exercise of employee stock options63 71 66 
Repurchase of shares(122)(1,608)(1,029)
Employee taxes paid from shares withheld(47)(37)(46)
Other - net(15)(6)(9)
Net cash used in financing activities(535)(3,258)(1,494)
Effect of currency on cash(5)(15)(4)
Total increase (decrease) in cash(141)68 87 
Cash at the beginning of the period438 370 283 
Cash at the end of the period$297 $438 $370 

The accompanying notes are an integral part of the consolidated financial statements.
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EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Ordinary sharesCapital in excess of par valueRetained earningsAccumulated other comprehensive lossShares held in trustTotal Eaton shareholders' equityNoncontrolling interestsTotal equity
(In millions)SharesDollars
Balance at January 1, 2019423.6 $4 $12,090 $8,161 $(4,145)$(3)$16,107 $35 $16,142 
Net income— — — 2,211 — — 2,211 2 2,213 
Other comprehensive loss, net of tax(145)(145)(145)
Cash dividends paid— — — (1,201)— — (1,201)(3)(1,204)
Issuance of shares under equity-based compensation plans
2.2 — 110 (1)— 1 110 — 110 
Acquisitions of businesses— — — — — — — 55 55 
Acquisition of noncontrolling interest obtained through tender offer
— — — — — — — (33)(33)
Business divestiture— — — — — — — (4)(4)
Changes in noncontrolling interest of consolidated subsidiaries - net
— — — — — — — (1)(1)
Repurchase of shares(12.5)— — (1,000)— — (1,000)— (1,000)
Balance at December 31, 2019413.3 4 12,200 8,170 (4,290)(2)16,082 51 16,133 
Net income— — — 1,410 — — 1,410 5 1,415 
Other comprehensive income, net of tax95 95 95 
Cash dividends paid— — — (1,175)— — (1,175)(9)(1,184)
Issuance of shares under equity-based compensation plans
1.9 — 129 (3)— — 126 — 126 
Changes in noncontrolling interest of consolidated subsidiaries - net
— — — — — — — (4)(4)
Repurchase of shares(17.1)— — (1,608)— — (1,608)— (1,608)
Balance at December 31, 2020398.1 4 12,329 6,794 (4,195)(2)14,930 43 14,973 
Net income— — — 2,144 — — 2,144 2 2,146 
Other comprehensive income, net of tax562 562 562 
Cash dividends paid— — — (1,219)— — (1,219)(1)(1,220)
Issuance of shares under equity-based compensation plans
1.6 — 120 (3)— 1 118 — 118 
Changes in noncontrolling interest of consolidated subsidiaries - net
— — — — — — — (6)(6)
Repurchase of shares(0.9)— — (122)— — (122)— (122)
Balance at December 31, 2021398.8 $4 $12,449 $7,594 $(3,633)$(1)$16,413 $38 $16,451 
The accompanying notes are an integral part of the consolidated financial statements.
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EATON CORPORATION plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).

Note 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Presentation
Eaton Corporation plc (Eaton or the Company) is an intelligent power management company dedicated to improving the quality of life and protecting the environment for people everywhere. We are guided by our commitment to do business right, to operate sustainably and to help our customers manage power – today and well into the future. By capitalizing on the global growth trends of electrification and digitalization, we're accelerating the planet's transition to renewable energy, helping to solve the world's most urgent power management challenges, and doing what's best for our stakeholders and all of society.
Founded in 1911, Eaton has been listed on the New York Stock Exchange for nearly a century. We reported revenues of $19.6 billion in 2021 and serve customers in more than 170 countries.
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial statements were filed with the Securities Exchange Commission.
The consolidated financial statements include the accounts of Eaton and all subsidiaries and other entities it controls. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has significant influence and generally a 20% to 50% ownership interest. Equity investments are evaluated for impairment whenever events or circumstances indicate the book value of the investment exceeds fair value. An impairment would exist if there is an other-than-temporary decline in value. Investments in associate companies included in Other assets were $777 million and $680 million as of December 31, 2021 and December 31, 2020, respectively, and income from these investments is reported in Other expense - net. Eaton does not have off-balance sheet arrangements with unconsolidated entities.
Eaton's reporting currency is United States Dollars (USD). The functional currency for most subsidiaries is their local currency. Financial statements for these subsidiaries are translated at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive loss.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Adoption of New Accounting Standard
Eaton adopted Accounting Standards Update 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, in the fourth quarter of 2021. This standard requires unbilled receivables (revenue recognized exceeds amount billed to customer) and deferred revenue liabilities (advanced payments and billings in excess of revenue recognized) from contracts with customers acquired as part of an acquisition of a business to be recognized and measured using revenue recognition accounting guidance, rather than at fair value. The adoption of the standard was applied to businesses acquired during 2021 and did not have a material impact on the consolidated financial statements.
LIBOR Transition
In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR. The final publication of rates for certain USD LIBOR tenors is expected to be on June 30, 2023. Various parties, including government agencies, are seeking to identify alternative rates to replace LIBOR. The Company has established a cross-functional project team to evaluate the potential impacts of alternative rates as replacements to LIBOR in the Company’s contracts, which primarily include revolving credit facilities, fixed-to-floating interest rate swaps, and forward starting floating-to-fixed interest rate swaps. As of December 31, 2021, the Company’s $500 million 364-day revolving credit facility that will expire on October 3, 2022 and $2,000 million five-year revolving credit facility that will expire on October 4, 2026 both include a transition process from LIBOR to an alternative rate. The Company’s interest rate swaps are expected to settle prior to June 30, 2023. The Company continues to evaluate the potential impacts of the transition from LIBOR to alternative rates in its contracts and the transition is not expected to have a material impact on the consolidated financial statements.
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Goodwill and Indefinite Life Intangible Assets
Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Goodwill is tested for impairment at the reporting unit level, and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company’s reporting units are equivalent to the reportable operating segments, except for the Aerospace segment which has two reporting units. Goodwill is assigned to each reporting unit, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis.
The annual goodwill impairment test was performed using a qualitative analysis in 2021 and 2020, except for the eMobility reporting unit which used a quantitative analysis. A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each reporting unit. The results of the qualitative analyses did not indicate a need to perform quantitative analysis.
Goodwill impairment testing was also performed using quantitative analyses in 2020 for the Electrical Americas, Electrical Global, Hydraulics and Aerospace reporting units due to a reorganization of the Company’s businesses and in 2020 as a result of the Hydraulics business being classified as held for sale as discussed in Note 2. The Company used the relative fair value method to reallocate goodwill.
Quantitative analyses were performed by estimating the fair value for each reporting unit using a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The future cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the reporting unit's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
Based on these analyses performed in 2021 and 2020, the fair value of Eaton's reporting units continue to substantially exceed their respective carrying amounts and thus, no impairment exists.
Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts. Indefinite life intangible asset impairment testing for 2021 and 2020 was performed using a quantitative analysis. The Company determines the fair value of these assets using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows, and profitability. Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. For 2021 and 2020, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
For additional information about goodwill and other intangible assets, see Note 6.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, Eaton uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
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Other Long-Lived Assets
Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. The Company uses the following depreciation and amortization periods:
CategoryEstimated useful life or amortization period
Buildings
Generally 40 years
Machinery and equipment
3 - 10 years
Software
5 - 15 years
Customer relationships, certain trademarks, and patents and technology
Weighted-average of 18 years
Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Determining asset groups and underlying cash flows requires the use of significant judgment.
Retirement Benefits Plans
For the principal pension plans in the United States, Canada, Puerto Rico, and the United Kingdom, the Company uses a market-related value of plan assets to calculate the expected return on assets used to determine net periodic benefit costs. The market-related value of plan assets is a calculated value that recognizes changes in the fair value of plan assets over a five year period. All other plans use fair value of plan assets.
Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor. The Company’s corridors are set at either 8% or 10%, depending on the plan, of the greater of the plan assets or benefit obligations. Gains or losses outside of the corridor are subject to amortization over an average employee future service period that differs by plan. If most or all of the plan’s participants are no longer actively accruing benefits, the average life expectancy is used. The amortization periods on a weighted average basis for United States and Non-United States pension plans are approximately 23 years and 10 years, respectively. The amortization period for other postretirement benefits plans is 7 years.
Asset Retirement Obligations
A conditional asset retirement obligation is recognized at fair value when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized when sufficient information is available to estimate fair value.
Income Taxes
Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to reverse. Deferred income tax assets are recognized for income tax loss carryforwards and income tax credit carryforwards. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates and adjusts these accruals based on changing facts and circumstances. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. Eaton's policy is to recognize income tax effects from accumulated other comprehensive income when individual units of account are sold, terminated, or extinguished. For additional information about income taxes, see Note 11.
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Derivative Financial Instruments and Hedging Activities
Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, currency, and interest rates on certain debt. These instruments are marked to fair value in the accompanying Consolidated Balance Sheets. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for hedge accounting are recognized immediately in net income. See Note 15 for additional information about hedges and derivative financial instruments.

Note 2.ACQUISITIONS AND DIVESTITURES OF BUSINESSES
Acquisition of controlling interest of Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S.
On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, with a primary focus on medium voltage solutions for industrial and utility customers. The purchase price for the shares was $214 million on a cash and debt free basis. As required by the Turkish capital markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 million to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Global business segment.
Acquisition of Innovative Switchgear Solutions, Inc.
On July 19, 2019, Eaton acquired Innovative Switchgear Solutions, Inc. (ISG), a specialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. ISG is reported within the Electrical Americas business segments.
Acquisition of Souriau-Sunbank Connection Technologies
On December 20, 2019, Eaton acquired the Souriau-Sunbank Connection Technologies (Souriau-Sunbank) business of TransDigm Group Inc. for a cash purchase price of $907 million, net of cash received. Headquartered in Versailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for harsh environments in the aerospace, defense, industrial, energy, and transport markets. Souriau-Sunbank is reported within the Aerospace business segment.
The acquisition of Souriau-Sunbank has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The final allocation as of the date of acquisition follows:
(In millions)Final
Allocation
Accounts receivable - net$60 
Inventory125 
Prepaid expenses and other current assets4 
Property, plant and equipment103 
Other intangible assets370 
Other assets8 
Accounts payable(33)
Other current liabilities(58)
Other noncurrent liabilities(126)
Total identifiable net assets453 
Noncontrolling interests(3)
Goodwill457 
Total consideration, net of cash received$907 


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Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets recognized and represents the anticipated synergies of acquiring Souriau-Sunbank. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. The estimated fair values of the customer relationships and technology intangible assets were $250 million and $95 million, respectively. The Company generally determines the fair value of intangible assets acquired using third-party valuations that are prepared using discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimated weighted-average useful lives was 20 years for customer relationships and 15 years for technology intangible assets. See Note 6 for additional information about goodwill and other intangible assets.
Eaton’s Consolidated Financial Statements include Souriau-Sunbank’s results of operations. Souriau-Sunbank's sales for the years ended December 31, 2020 and 2019 were $287 million and $3 million, respectively.
Sale of Automotive Fluid Conveyance business
On December 31, 2019, Eaton sold its Automotive Fluid Conveyance Business. The transaction resulted in a pre-tax loss of $66 million which was recorded in Other expense - net. This business was reported within the Vehicle business segment.
Acquisition of Power Distribution, Inc.
On February 25, 2020, Eaton acquired Power Distribution, Inc. a leading supplier of mission critical power distribution, static switching, and power monitoring equipment and services for data centers and industrial and commercial customers. The company is headquartered in Richmond, Virginia and is reported within the Electrical Americas business segment.
Sale of Lighting business
On March 2, 2020, Eaton sold its Lighting business to Signify N.V. for a cash purchase price of $1.4 billion. As a result of the sale, the Company recognized a pre-tax gain of $221 million in 2020. The Lighting business, which had sales of $1.6 billion in 2019 as part of the Electrical Americas business segment, served customers in commercial, industrial, residential, and municipal markets.
Acquisition of Tripp Lite
On March 17, 2021, Eaton acquired Tripp Lite for $1.65 billion, net of cash received. Tripp Lite is a leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas. Tripp Lite is reported within the Electrical Americas business segment.
The acquisition of Tripp Lite has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date, as well as measurement period adjustments recorded as of December 31, 2021. These preliminary estimates will continue to be revised during the measurement period as further information becomes available and additional analyses are performed. The third-party valuations for Other intangible assets and Property, plant and equipment have been received. The current measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
(In millions)Preliminary AllocationMeasurement Period AdjustmentsAdjusted Preliminary Allocation
Short-term investments$5 $— $5 
Accounts receivable 94 — 94 
Inventory184 (7)177 
Prepaid expenses and other current assets6 (1)5 
Property, plant and equipment6 (5)1 
Other intangible assets630 (26)604 
Other assets— 2 2 
Accounts payable(13)— (13)
Other current liabilities(32)(3)(35)
Other noncurrent liabilities(157)(3)(160)
Total identifiable net assets723 (43)680 
Goodwill928 43 971 
Total consideration, net of cash received$1,651 $— $1,651 
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Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Tripp Lite. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. The adjusted preliminary estimated fair values of the customer relationships, trademarks and technology intangible assets of $539 million, $33 million and $32 million, respectively, were determined using either the relief-from-royalty model or the multi-period excess earnings model, which are discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The estimated useful lives for customer relationships, trademarks and technology intangible assets were 20 years, 15 years, and 5 years, respectively. See Note 6 for additional information about goodwill and other intangible assets.
Eaton's 2021 Consolidated Financial Statements include Tripp Lite’s results of operations, including segment operating profit of $139 million on sales of $419 million, from the date of acquisition through December 31, 2021.
Acquisition of Green Motion SA
On March 22, 2021, Eaton acquired Green Motion SA, a leading designer and manufacturer of electric vehicle charging hardware and related software based in Switzerland. Green Motion SA was acquired for $106 million, including $49 million of cash paid at closing and $57 million of estimated fair value of contingent future consideration based on 2023 and 2024 revenue performance. The fair value of contingent consideration liabilities is estimated by discounting contingent payments expected to be made, and may increase or decrease based on changes in revenue estimates and discount rates, with a maximum possible undiscounted value of $109 million. Green Motion SA is reported within the Electrical Global business segment.
Acquisition of a 50% stake in HuanYu High Tech
On March 29, 2021, Eaton acquired a 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region. HuanYu High Tech has production operations in Wenzhou, China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.
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Acquisition of Cobham Mission Systems
On June 1, 2021, Eaton acquired Cobham Mission Systems (CMS) for $2.80 billion, net of cash received. CMS is a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. CMS is reported within the Aerospace business segment.
The acquisition of CMS has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date, as well as measurement period adjustments recorded as of December 31, 2021. These preliminary estimates will continue to be revised during the measurement period as third-party valuations are received and finalized, further information becomes available and additional analyses are performed, and these differences could have a material impact on Eaton's preliminary purchase price allocation. The current measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
(In millions)Preliminary AllocationMeasurement Period AdjustmentsAdjusted Preliminary Allocation
Accounts receivable $84 $— $84 
Inventory179 (1)178 
Prepaid expenses and other current assets45 7 52 
Property, plant and equipment86 — 86 
Other intangible assets1,575 — 1,575 
Other assets19 (9)10 
Accounts payable(40)— (40)
Other current liabilities(159)3 (156)
Other noncurrent liabilities(77)(3)(80)
Total identifiable net assets1,712 (3)1,709 
Goodwill1,088 3 1,091 
Total consideration, net of cash received$2,800 $— $2,800 
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring CMS. As a result of the acquisition, goodwill of $295 million recognized in the United States is expected to be deductible for tax purposes. Other intangible assets of $1,575 million include customer relationships, technology and backlog. Given the timing of the acquisition, Eaton utilized a benchmarking approach based on similar acquisitions to determine the preliminary fair values for intangible assets. See Note 6 for additional information about goodwill and other intangible assets.
Eaton's 2021 Consolidated Financial Statements include CMS’s results of operations, including segment operating profit of $128 million on sales of $450 million, from the date of acquisition through December 31, 2021.
Acquisition of a 50% stake in Jiangsu YiNeng Electric's busway business
On June 25, 2021, Eaton acquired a 50 percent stake in Jiangsu YiNeng Electric's busway business, which manufactures and markets busway products in China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.
Sale of Hydraulics business
On January 21, 2020, Eaton entered into an agreement to sell its Hydraulics business to Danfoss A/S, a Danish industrial company. The Hydraulics business sold hydraulics components, systems, and services for industrial and mobile equipment. The business had sales of $1.8 billion in 2020 and $1.3 billion in 2021 through the date of the sale.
During the first quarter of 2020, the Company determined the Hydraulics business met the criteria to be classified as held for sale. Therefore, assets and liabilities of the business have been presented as held for sale in the Consolidated Balance Sheet as of December 31, 2020. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell.
No write-down was required as fair value of the Hydraulics business assets less the costs to sell exceed their respective carrying value. Depreciation and amortization expense was not recorded for the period in which Other long-lived assets were classified as held for sale.
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The Company used the relative fair value method to allocate goodwill to the Hydraulics business. The fair value of the Hydraulics business was estimated based on a combination of the price paid to Eaton by Danfoss A/S and a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions.
The assets and liabilities classified as held for sale for the Hydraulics business on the December 31, 2020 Consolidated Balance Sheet are as follows:
(In millions)December 31, 2020
Accounts receivable - net$345 
Inventory369 
Prepaid expenses and other current assets18 
Net property, plant and equipment504 
Goodwill920 
Other intangible assets248 
Operating lease assets61 
Deferred income taxes6 
Other noncurrent assets16 
Assets held for sale - current$2,487 
Accounts payable$241 
Accrued compensation26 
Other current liabilities101 
Pension liabilities60 
Operating lease liabilities35 
Deferred income taxes3 
Other noncurrent liabilities2 
Liabilities held for sale - current$468 
On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S. As a result of the sale, the Company received $3.1 billion, net of cash sold, and recognized a pre-tax gain of $617 million, subject to post-closing adjustments to be negotiated with Danfoss A/S. The Hydraulics business did not meet the criteria to be classified as discontinued operations as the sale does not represent a strategic shift that will have a major effect on the Company's operations.
Acquisition of Royal Power Solutions
On January 5, 2022, Eaton acquired Royal Power Solutions for $600 million. Royal Power Solutions is a U.S. based manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets. Royal Power Solutions will be reported within the eMobility business segment.
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Note 3.    REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.
The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when title and risk and rewards of ownership have transferred to the customer. Sales recognized over time are less than 5% of Eaton’s Consolidated Net Sales. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the extent it is not probable that a significant reversal of cumulative sales will occur. Additionally, contracts can be modified to account for changes in contract specifications, requirements or sale price. The effect of a contract modification on the sales price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a cumulative catch-up basis.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and are recorded gross on the Consolidated Balance Sheet.
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they are typically earned at the completion of the contract when the customer is invoiced or when the customer pays Eaton.
Sales of products and services varies by segment and are discussed in Note 17.
In the Electrical Americas segment, sales contracts are primarily for electrical components, industrial components, power distribution and assemblies, residential products, single phase power quality and connectivity, three phase power quality, wiring devices, circuit protection, utility power distribution, power reliability equipment, and services that are primarily produced and sold in North and South America. The majority of the sales in this segment contain performance obligations satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. However, certain power distribution and power quality services are recognized over time.
In the Electrical Global segment, sales contracts are primarily for electrical components, industrial components, power distribution and assemblies, single phase and three phase power quality, and services that are primarily produced and sold outside of North and South America, as well as hazardous duty electrical equipment, emergency lighting, fire detection, intrinsically safe explosion-proof instrumentation, and structural support systems that are produced and sold globally. The majority of the sales contracts in this segment contain performance obligations satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. However, certain power distribution and power quality services are recognized over time.
In the Aerospace segment, sales contracts are primarily for aerospace fuel, hydraulics, and pneumatic systems for commercial and military use, as well as filtration systems for industrial applications. These sales contracts are primarily based on a customer’s purchase order, and frequently covered by terms and conditions included in a long-term agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. Our military contracts are primarily fixed-price contracts that are not subject to performance-based payments or progress payments from the customer.
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Many of the products and services in power distribution and power quality services in the Electrical Americas and Electrical Global business segments and contracts to develop new products that are fully funded by customers in the Aerospace business segment meet the definition of continuous transfer of control to customers and are recognized over time. These products are engineered to a customer’s design specifications, have no alternative use to Eaton, and are controlled by the customer as evidenced by the customer’s contractual ownership of the work in process or our right to payment for work performed to date plus a reasonable margin. As control is transferring over time, sales are recognized based on the extent of progress towards completion of the obligation. Eaton generally uses an input method to determine the progress completed and sales are recorded proportionally as costs are incurred. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.
In the Hydraulics segment, sales contracts were primarily for hydraulic components and systems for industrial and mobile equipment. These sales contracts were primarily based on a customer’s purchase order. In this segment, performance obligations were generally satisfied at a point in time when we ship the product from our facility.
In the Vehicle segment, sales contracts are primarily for drivetrains, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks, and commercial vehicles. These sales contracts are primarily based on a customer’s purchase order or a blanket purchase order subject to firm releases, frequently covered by terms and conditions included in a master supply agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In the eMobility segment, sales contracts are primarily for mechanical, electrical, and electronic components and systems that improve the power management and performance of both on-road and off-road vehicles. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In limited circumstances, primarily in the Electrical and Vehicle segments, Eaton sells separately-priced warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Sales for these separately-priced warranties are recorded based on their stand-alone selling price and are recognized as revenue over the length of the warranty period.
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The following table provides disaggregated sales by lines of businesses, geographic destination, market channel or end market, as applicable, for the Company's operating segments:
(In millions)202120202019
Electrical Americas
Products$2,255 $2,255 $3,675 
Systems4,987 4,425 4,500 
Total$7,242 $6,680 $8,175 
Electrical Global
Products$3,283 $2,608 $2,782 
Systems2,233 2,095 2,390 
Total$5,516 $4,703 $5,172 
Hydraulics
United States$534 $796 $1,000 
Rest of World766 1,046 1,204 
Total$1,300 $1,842 $2,204 
Aerospace
Original Equipment Manufacturers$1,018 $986 $1,178 
Aftermarket823 685 859 
Industrial and Other807 552 443 
Total$2,648 $2,223 $2,480 
Vehicle
Commercial$1,438 $1,060 $1,538 
Passenger and Light Duty1,141 1,058 1,500 
Total$2,579 $2,118 $3,038 
eMobility$343 $292 $321 
Total net sales$19,628 $17,858 $21,390 
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of revenue recognized). Accounts receivables from customers were $2,896 million and $2,539 million at December 31, 2021 and December 31, 2020, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $187 million and $90 million at December 31, 2021 and December 31, 2020, respectively, and are recorded in Prepaid expenses and other current assets. The increase in unbilled receivables reflects higher revenue recognized from increased business activity in 2021 and the addition of unbilled receivables from acquisitions.






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Changes in the deferred revenue liabilities are as follows:
(In millions)Deferred revenue
Balance at January 1, 2020$234 
Customer deposits and billings1,041 
Revenue recognized in the period(1,014)
Translation 7 
Deferred revenue reclassified to held for sale(11)
Balance at December 31, 2020$257 
Customer deposits and billings1,267 
Revenue recognized in the period(1,192)
Deferred revenue from business acquisitions99 
Translation and other(9)
Balance at December 31, 2021$422 
Deferred revenue liabilities of $395 million and $230 million as of December 31, 2021 and 2020, respectively, were included in Other current liabilities with the remaining balance presented in Other noncurrent liabilities.
A significant portion of open orders placed with Eaton are by original equipment manufacturers or distributors. These open orders are not considered firm as they have been historically subject to releases by customers. In measuring backlog of unsatisfied or partially satisfied obligations, only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at December 31, 2021 was approximately $7.7 billion. At December 31, 2021, approximately 87% of this backlog is targeted for delivery to customers in the next twelve months and the rest thereafter.

Note 4. CREDIT LOSSES FOR RECEIVABLES
Receivables are exposed to credit risk based on the customers' ability to pay which is influenced by, among other factors, their financial liquidity position. Eaton's receivables are generally short-term in nature with a majority outstanding less than 90 days.
Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its receivables based on the length of time the receivable is past due, and any anticipated future write-off based on historic experience adjusted for market conditions. The Company's segments, supported by our global credit department, perform the credit evaluation and monitoring process to estimate and manage credit risk. The process includes an evaluation of credit losses for both the overall segment receivable and specific customer balances. The process also includes review of customer financial information and credit ratings, approval and monitoring of customer credit limits, and an assessment of market conditions. The Company may also require prepayment from customers to mitigate credit risk. Receivable balances are written off against an allowance for credit losses after a final determination of collectability has been made.
Accounts receivable are net of an allowance for credit losses of $42 million and $48 million at December 31, 2021 and 2020. The change in the allowance for credit losses includes expense and net write-offs, none of which are significant.
Note 5. INVENTORY
Inventory is carried at lower of cost or net realizable value using the first-in, first-out (FIFO) method. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and costs of the distribution network.
The components of inventory are as follows:
December 31
(In millions)20212020
Raw materials$1,096 $803 
Work-in-process620 498 
Finished goods1,253 808 
Total inventory$2,969 $2,109 
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Note 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment are as follows:
(In millions)January 1, 2020AdditionsGoodwill reclassified to held for saleTranslationDecember 31, 2020AdditionsTranslationDecember 31, 2021
Electrical Americas$6,352 $97 $— $7 $6,456 $971 $(10)$7,417 
Electrical Global4,106 7 — 182 4,295 85 (197)4,183 
Hydraulics921 — (907)(14)— — — — 
Aerospace1,706 15 — 56 1,777 1,091 (87)2,781 
Vehicle291 — — 2 293 — (3)290 
eMobility80 — — 2 82 — (2)80 
Total$13,456 $119 $(907)$235 $12,903 $2,147 $(299)$14,751 
The 2021 additions to goodwill relate to the anticipated synergies of acquiring Cobham Mission Systems, Tripp Lite, and Green Motion SA. The allocations of the purchase price from these acquisitions are preliminary and will be completed during the measurement periods. The 2020 additions to goodwill primarily relate to the anticipated synergies of acquiring Power Distribution, Inc.
A summary of other intangible assets is as follows:
December 31
20212020
(In millions)Historical
cost		Accumulated
amortization		Historical
cost		Accumulated
amortization
Intangible assets not subject to amortization
Trademarks$1,374 $1,382 
Intangible assets subject to amortization
Customer relationships$4,752 $1,974 $3,415 $1,795 
Patents and technology1,879 712 1,428 773 
Trademarks951 518 970 505 
Other165 62 91 38 
Total intangible assets subject to amortization$7,747 $3,266 $5,904 $3,111 
Amortization expense related to intangible assets subject to amortization in 2021, and estimated amortization expense for each of the next five years, is as follows:
(In millions)
2021$431 
2022471 
2023421 
2024387 
2025382 
2026366 

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Note 7.    LEASES
Eaton leases certain manufacturing facilities, warehouses, distribution centers, office space, vehicles, and equipment. Most real estate leases contain renewal options. The exercise of lease renewal options is at the Company's sole discretion. The Company's lease agreements typically do not contain any significant guarantees of asset values at the end of a lease or restrictive covenants. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The components of lease expense are as follows:
(In millions)202120202019
Operating lease cost$164 $184 $166 
Finance lease cost:
Amortization of lease assets12 6 5 
Interest on lease liabilities2 1 1 
Short-term lease cost15 18 46 
Variable lease cost16 3 22 
Sublease income(2)(2)(3)
Total lease cost$207 $210 $237 
There were no sale leaseback transactions for the year ended December 31, 2021. The net gains recorded on sale leaseback transactions were $9 million and $16 million for the years ended December 31, 2020 and 2019.

Supplemental cash flow information related to leases is as follows:
(In millions)202120202019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows - payments on operating leases$(158)$(144)$(168)
Operating cash outflows - interest payments on finance leases(2)(1)(1)
Financing cash outflows - payments on finance lease obligations(11)(8)(6)
Lease assets obtained in exchange for new lease obligations, including leases acquired:
Operating leases$145 $144 $114 
Finance leases14 16 24 
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Supplemental balance sheet information related to leases is as follows:
December 31
(In millions)20212020
Operating Leases
Operating lease assets$442 $428 
Other current liabilities120 116 
Operating lease liabilities337 326 
Total operating lease liabilities$457 $442 
Finance Leases
Land and buildings$6 $13 
Machinery and equipment47 38 
Accumulated depreciation(19)(16)
Net property, plant and equipment$34 $35 
Current portion of long-term debt$15 $8 
Long-term debt23 30 
Total finance lease liabilities$38 $38 
December 31
20212020
Weighted-average remaining lease term
Operating leases5.4 years5.5 years
Finance leases5.3 years7.4 years
Weighted-average discount rate
Operating leases2.6 %3.3 %
Finance leases3.3 %3.5 %

Maturities of lease liabilities at December 31, 2021 are as follows:
(In millions)Operating LeasesFinance Leases
2022$127 $16 
2023104 7 
202477 6 
202549 2 
202636 2 
Thereafter100 7 
Total lease payments493 40 
Less imputed interest36 2 
Total present value of lease liabilities$457 $38 

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Note 8. DEBT
A summary of long-term debt, including the current portion, is as follows:
December 31
(In millions)20212020
3.47% notes due 2021 ($275 converted to floating rate by interest rate swap)
$— $300 
0.02% Euro notes due 2021
— 737 
8.10% debentures due 2022 ($100 converted to floating rate by interest rate swap)
100 100 
2.75% senior notes due 2022 ($1,400 converted to floating rate by interest rate swap)
1,600 1,600 
3.68% notes due 2023 ($200 converted to floating rate by interest rate swap)
300 300 
0.75% Euro notes due 2024
624 676 
6.50% debentures due 2025
145 145 
0.70% Euro notes due 2025
567 614 
0.128% Euro notes due 2026
1,021 — 
3.10% senior notes due 2027
700 700 
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap)
200 200 
0.577% Euro notes due 2030
681 — 
4.00% senior notes due 2032
700 700 
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap)
136 136 
5.80% notes due 2037
240 240 
4.15% senior notes due 2042
1,000 1,000 
3.92% senior notes due 2047
300 300 
5.25% to 7.875% notes (maturities ranging from 2024 to 2035, including $25 converted to floating rate by interest rate swap)
165 165 
Other87 144 
Total long-term debt8,566 8,057 
Less current portion of long-term debt(1,735)(1,047)
Long-term debt less current portion$6,831 $7,010 
Substantially all these long-term debt instruments are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries (the Senior Notes). Further, as of December 31, 2021, all of these long-term debt instruments, except the 3.68% notes due 2023, the 0.75% Euro notes due 2024, the 0.70% Euro notes due 2025, the 0.128% Euro notes due 2026, and the 0.577% Euro notes due 2030, are registered by Eaton Corporation under the Securities Act of 1933, as amended (the Registered Senior Notes).
On March 8, 2021, a subsidiary of Eaton issued Euro denominated notes (2021 Euro Notes) with a face value of €1,500 million ($1,798 million), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2021 Euro Notes are comprised of two tranches of €900 million and €600 million, which mature in 2026 and 2030, respectively, with interest payable annually at a respective rate of 0.128% and 0.577%. The issuer received proceeds totaling €1,494 million ($1,790 million) from the issuance, net of financing costs and discounts. The senior 2021 Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2021 Euro Notes contain customary optional redemption and par call provisions. The 2021 Euro Notes also contain a change of control provision which requires the Company to make an offer to purchase all or any part of the 2021 Euro Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees are amortized in Interest expense-net over the respective terms of the 2021 Euro Notes. The 2021 Euro Notes are subject to customary non-financial covenants.
On May 17, 2021, the Company entered into a $2,500 million 364-day revolving credit facility, which brought the Company’s total revolving credit facilities to $4,500 million. At June 30, 2021, the Company had access to the commercial paper markets through its $4,500 million commercial paper program, of which $3,372 million was outstanding including funds to finance the acquisition of Cobham Mission Systems discussed in Note 2. Eaton used the proceeds from the sale of the Hydraulics business, which was completed August 2, 2021, to reduce its outstanding commercial paper borrowings.
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On September 22, 2021, the Company downsized the 364-day revolving credit facility from $2,500 million to $500 million, which reduced the Company's total revolving credit facilities to $2,500 million. In September 2021, the Company also downsized its commercial paper program to $2,500 million.
On October 4, 2021, the Company replaced its existing $500 million 364-day revolving credit facility, $750 million five-year revolving credit facility, $500 million four-year revolving credit facility, and $750 million five-year revolving credit facility, with a new $500 million 364-day revolving credit facility and a new $2,000 million five-year revolving credit facility that will expire on October 4, 2026. The revolving credit facilities totaling $2,500 million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton’s revolving credit facilities at December 31, 2021. The Company maintains access to the commercial paper markets through its $2,500 million commercial paper program, of which none was outstanding on December 31, 2021.
In addition to the revolving credit facilities, the Company also had available lines of credit of $972 million from various banks primarily for the issuance of letters of credit, of which there was $335 million outstanding at December 31, 2021. Borrowings outside the United States are generally denominated in local currencies.
Eaton is in compliance with each of its debt covenants for all periods presented.
Maturities of long-term debt for each of the next five years are as follows:
(In millions)
2022$1,735 
2023306 
2024695 
2025715 
20261,095 
Interest paid on debt is as follows:
(In millions)
2021$207 
2020216 
2019279 

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Note 9. RETIREMENT BENEFITS PLANS
Eaton has defined benefits pension plans and other postretirement benefits plans.
Obligations and Funded Status
United States
pension liabilities		Non-United States
pension liabilities		Other postretirement
liabilities
(In millions)202120202021202020212020
Funded status
Fair value of plan assets$3,672 $3,463 $2,247 $2,137 $19 $20 
Benefit obligations(3,760)(4,121)(2,837)(3,036)(304)(375)
Funded status$(88)$(658)$(590)$(899)$(285)$(355)
Amounts recognized in the Consolidated
   Balance Sheets
Non-current assets$59 $— $179 $95 $— $— 
Current liabilities(16)(36)(28)(28)(22)(25)
Non-current liabilities(131)(622)(741)(966)(263)(330)
Total$(88)$(658)$(590)$(899)$(285)$(355)
Amounts recognized in Accumulated other
   comprehensive loss (pre-tax)
Net actuarial (gain) loss$708 $1,046 $745 $1,005 $(55)$1 
Prior service cost (credit)5 5 18 21 — (3)
Total$713 $1,051 $763 $1,026 $(55)$(2)
Change in Benefit Obligations
United States
pension liabilities		Non-United States
pension liabilities		Other postretirement
liabilities
(In millions)202120202021202020212020
Balance at January 1$4,121 $4,028 $3,036 $2,747 $375 $378 
Service cost37 97 72 73 1 2 
Interest cost70 103 40 45 6 9 
Actuarial (gain) loss (82)223 (143)217 (59)11 
Gross benefits paid(435)(330)(107)(121)(36)(49)
Currency translation— — (79)137 — 2 
Plan amendments1 — — 1 — — 
Acquisitions and divestitures48 — 14 — 2 — 
Benefit obligation reclassified to held for sale— — — (65)— — 
Other— — 4 2 15 22 
Balance at December 31$3,760 $4,121 $2,837 $3,036 $304 $375 
Accumulated benefit obligation$3,707 $4,054 $2,709 $2,862 
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During 2020, the Company announced it was freezing its United States pension plans for its non-union employees. The freeze was effective January 1, 2021 for non-union U.S. employees whose retirement benefit was determined under a cash balance formula and is effective January 1, 2026 for non-union U.S. employees whose retirement benefit is determined under a final average pay formula.
Actuarial gains related to changes in the United States and Non-United States benefit obligations in 2021 of $82 million and $143 million, respectively, were primarily due to increases in the discount rates used to measure the obligations. Actuarial losses related to changes in the United States and Non-United States benefit obligations in 2020 of $223 million and $217 million, respectively, were primarily due to decreases in the discount rates used to measure the obligations, partially offset by curtailment gains related to amendments to freeze the Company's United States pension plans for its non-union employees.
Change in Plan Assets
United States
pension liabilities		Non-United States
pension liabilities		Other postretirement
liabilities
(In millions)202120202021202020212020
Balance at January 1$3,463 $3,433 $2,137 $1,903 $20 $23 
Actual return on plan assets380 342 127 185 — 1 
Employer contributions237 18 106 104 20 23 
Gross benefits paid(435)(330)(107)(121)(36)(49)
Currency translation— — (23)69 — — 
Acquisitions and divestitures27 — 4 — — — 
Plan assets reclassified to held for sale— — — (5)— — 
Other— — 3 2 15 22 
Balance at December 31$3,672 $3,463 $2,247 $2,137 $19 $20 
The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 are as follows:
United States
pension liabilities		Non-United States
pension liabilities
(In millions)2021202020212020
Accumulated benefit obligation$131 $4,054 $894 $2,586 
Fair value of plan assets— 3,463 207 1,756 
The components of pension plans with a projected benefit obligation in excess of plan assets at December 31 are as follows:
United States
pension liabilities		Non-United States
pension liabilities
(In millions)2021202020212020
Projected benefit obligation$147 $4,121 $1,290 $2,763 
Fair value of plan assets— 3,463 521 1,770 
Other postretirement benefit plans with accumulated postretirement benefit obligations in excess of plan assets have been disclosed in the Obligations and Funded Status table.






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Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss are as follows:
United States
pension liabilities		Non-United States
pension liabilities		Other postretirement
liabilities
(In millions)202120202021202020212020
Balance at January 1$1,051 $1,103 $1,026 $904 $(2)$(25)
Prior service cost arising during the year1 — — 1 — — 
Net loss (gain) arising during the year(238)112 (151)141 (59)10 
Currency translation— — (24)48 — — 
Other— — — 2 — — 
Less amounts included in expense during the year(101)(164)(88)(70)6 13 
Net change for the year(338)(52)(263)122 (53)23 
Balance at December 31$713 $1,051 $763 $1,026 $(55)$(2)
Benefits Expense
United States pension
benefit expense (income)		Non-United States pension
benefit expense (income)		Other postretirement
benefits expense (income)
(In millions)202120202019202120202019202120202019
Service cost$37 $97 $91 $72 $73 $58 $1 $2 $2 
Interest cost70 103 138 40 45 57 6 9 14 
Expected return on plan assets(223)(231)(235)(120)(109)(106)— — (2)
Amortization36 102 62 71 60 38 (5)(13)(14)
 (80)71 56 63 69 47 2 (2)— 
Settlements, curtailments and special termination benefits65 62 48 17 10 14 (1)— — 
Total expense (income)$(15)$133 $104 $80 $79 $61 $1 $(2)$— 
Total retirement benefits expense for 2021 of $66 million included $13 million of settlement and curtailment expense related to the sale of the Hydraulics business discussed in Note 2.
Total retirement benefits expense for 2019 of $165 million included $8 million of settlement expense related to the sale of the Automotive Fluid Conveyance Business discussed in Note 2.
The components of retirement benefits expense (income) other than service costs are included in Other expense - net.
Retirement Benefits Plans Assumptions
In 2019, 2020, and 2021, for purposes of determining liabilities related to the majority of its plans in the United States, the Company used mortality tables that are based on the Company's own experience and generational improvement scales that are based on MP-2019, MP-2020, and MP-2021, respectively.
To estimate the service and interest cost components of net periodic benefit cost for the vast majority of its defined benefits pension and other postretirement benefits plans, the Company used a spot rate approach by applying the specific spot rates along the yield curve used to measure the benefit obligation at the beginning of the period to the relevant projected cash flows.








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Pension Plans
United States
pension plans		Non-United States
pension plans
202120202019202120202019
Assumptions used to determine benefit obligation at year-end
Discount rate2.81 %2.48 %3.22 %2.01 %1.59 %2.02 %
Rate of compensation increase3.12 %3.12 %3.14 %3.01 %3.02 %3.05 %
Interest rate used to credit cash balance plans1.99 %2.02 %2.59 %0.56 %0.53 %0.54 %
Assumptions used to determine expense
Discount rate used to determine benefit obligation2.61 %3.22 %4.28 %1.63 %2.02 %2.83 %
Discount rate used to determine service cost2.92 %3.34 %4.39 %2.52 %2.78 %4.02 %
Discount rate used to determine interest cost1.83 %2.75 %3.94 %1.36 %1.82 %2.56 %
Expected long-term return on plan assets6.75 %7.25 %7.25 %5.62 %5.84 %6.42 %
Rate of compensation increase3.12 %3.14 %3.14 %3.02 %3.05 %3.10 %
Interest rate used to credit cash balance plans2.14 %2.59 %3.13 %0.52 %0.54 %2.60 %
The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The expected long-term rates of return on pension assets for United States pension plans and Non-United States pension plans for 2022 are 6.50% and 5.70%, respectively. The discount rates were determined using appropriate bond data for each country.
Other Postretirement Benefits Plans
Substantially all of the obligation for other postretirement benefits plans relates to United States plans. Assumptions used to determine other postretirement benefits obligations and expense are as follows:
Other postretirement
benefits plans
202120202019
Assumptions used to determine benefit obligation at year-end
Discount rate2.79 %2.37 %3.13 %
Health care cost trend rate assumed for next year7.45 %7.05 %6.95 %
Ultimate health care cost trend rate4.75 %4.75 %4.75 %
Year ultimate health care cost trend rate is achieved203120302029
Assumptions used to determine expense
Discount rate used to determine benefit obligation2.44 %3.13 %4.23 %
Discount rate used to determine service cost2.76 %3.25 %4.29 %
Discount rate used to determine interest cost1.70 %2.67 %3.85 %
Initial health care cost trend rate7.38 %6.95 %7.10 %
Ultimate health care cost trend rate4.75 %4.75 %4.75 %
Year ultimate health care cost trend rate is achieved203020292028







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Employer Contributions to Retirement Benefits Plans
Contributions to pension plans that Eaton expects to make in 2022, and made in 2021, 2020 and 2019, are as follows:
(In millions)
Expected in 2022
202120202019
United States plans$17 $237 $18 $17 
Non-United States plans97 106 104 102 
Total contributions$114 $343 $122 $119 

The following table provides the estimated pension and other postretirement benefit payments for each of the next five years, and the five years thereafter in the aggregate. For other postretirement benefits liabilities, the expected subsidy receipts related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 would reduce the gross payments listed below.
Estimated
United States
pension payments		Estimated
non-United States
pension payments		Estimated other postretirement
benefit payments
(In millions)GrossMedicare prescription
drug subsidy
2022$303 $106 $25 $— 
2023296 107 21 — 
2024281 111 20 — 
2025276 113 18 — 
2026265 118 17 — 
2027 - 20311,176 642 94 (1)
Pension Plan Assets
Investment policies and strategies are developed on a country and plan specific basis. The United States plans, representing 62% of worldwide pension assets, and the United Kingdom plans representing 29% of worldwide pension assets, are invested primarily for growth, as the majority of the assets are in plans with active participants and ongoing accruals. In general, the plans are primarily allocated to diversified global equities, primarily through index funds in the form of common collective and other trusts. The United States plans' target allocation is 19% United States equities, 19% non-United States equities, 6% real estate (primarily equity of real estate investment trusts), 47% debt securities and 9% other, including private equity, private debt and cash equivalents. The United Kingdom plans' target asset allocations are 44% equities and the remainder in debt securities, cash equivalents and real estate investments. The equity risk for the plans is managed through broad geographic diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for these plans are longer duration government and corporate debt. The United States, United Kingdom and Canada pension plans are authorized to use derivatives to achieve more economically desired market exposures through the use of futures, swaps and options to gain or hedge exposures.
Fair Value Measurements
Financial instruments included in pension and other postretirement benefits plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology are as follows:
Level 1 -Quoted prices (unadjusted) for identical assets in active markets.
Level 2 -Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 -Unobservable prices or inputs.
Certain investments that are measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables to permit a reconciliation to total plan assets.
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Pension Plans
A summary of the fair value of pension plan assets at December 31, 2021 and 2020, is as follows:
(In millions)TotalQuoted prices
in active
markets for
identical assets
(Level 1)		Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)1
2021  
Common collective trusts
Non-United States equity and global equities$586 $— $586 $— 
United States equity240 — 240 — 
Fixed income624 — 624 — 
Fixed income securities1,074 — 1,074 — 
United States treasuries417 417 — — 
Bank loans117 — 117 — 
Real estate471 237 18 216 
Equity securities2 2 — — 
Cash equivalents150 28 122 — 
Exchange traded funds122 122 — — 
Other365 — 46 319 
Common collective and other trusts measured at net asset value
1,841 
Money market funds measured at net asset value9 
Pending purchases and sales of plan assets, and interest
    receivable		(99)
Total pension plan assets$5,919 $806 $2,827 $535 
1 These pension plan assets include private real estate, private credit and private equity funds that generally have redemption notice periods of six months or longer, and are not eligible for redemption until the underlying assets are liquidated or distributed. The Company has unfunded commitments to these funds of approximately $192 million at December 31, 2021, which will be satisfied by a reallocation of pension plan assets.
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(In millions)TotalQuoted prices
in active
markets for
identical assets
(Level 1)		Other
observable
inputs
(Level 2)
Unobservable
inputs
(Level 3)1
2020    
Common collective trusts
Non-United States equity and global equities$610 $— $610 $— 
United States equity73 — 73 — 
Fixed income681 — 681 — 
Fixed income securities1,021 — 1,021 — 
United States treasuries316 316 — — 
Bank loans110 — 110 — 
Real estate419 221 14 184 
Cash equivalents184 71 113 — 
Exchange traded funds88 88 — — 
Other213 — 39 174 
Common collective and other trusts measured at net asset value
1,987 
Money market funds measured at net asset value6 
Pending purchases and sales of plan assets, and interest
    receivable		(108)
Total pension plan assets$5,600 $696 $2,661 $358 
1 These pension plan assets include private real estate, private credit and private equity funds that generally have redemption notice periods of six months or longer, and are not eligible for redemption until the underlying assets are liquidated or distributed. The Company has unfunded commitments to these funds of approximately $254 million at December 31, 2020, which will be satisfied by a reallocation of pension plan assets.

The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2020 and 2021 due to the following:
(In millions)Real estateOtherTotal
Balance at January 1, 2020$61 $129 $190 
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end
2 12 14 
Purchases, sales, settlements - net
121 33 154 
Transfers into or out of Level 3— — — 
Balance at December 31, 2020184 174 358 
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end
28 61 89 
Purchases, sales, settlements - net
4 79 83 
Transfers into or out of Level 3— 5 5 
Balance at December 31, 2021$216 $319 $535 

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Other Postretirement Benefits Plans
A summary of the fair value of other postretirement benefits plan assets at December 31, 2021 and 2020, is as follows:
(In millions)TotalQuoted prices
in active
markets for
identical assets
(Level 1)		Other
observable
inputs
(Level 2)		Unobservable
inputs
(Level 3)
2021    
Cash equivalents$3 $3 $— $— 
Common collective and other trusts measured at net asset value
16 
Total other postretirement benefits plan assets$19 $3 $— $— 
(In millions)TotalQuoted prices
in active
markets for
identical assets
(Level 1)		Other
observable
inputs
(Level 2)		Unobservable
inputs
(Level 3)
2020    
Cash equivalents$3 $3 $— $— 
Common collective and other trusts measured at net asset value
17 
Total other postretirement benefits plan assets$20 $3 $— $— 
Valuation Methodologies
Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2021 and 2020.
Common collective and other trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. The investments in other trusts are predominantly in exchange traded funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. Common collective and other trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt securities is determined through third-party pricing models that consider various assumptions, including time value, yield curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.
Equity securities - These securities consist of comingled funds and direct investments consisting of the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded.
United States treasuries - Valued at the closing price of each security.
Bank loans - These securities consist of senior secured term loans of publicly traded and privately held United States and non-United States floating rate obligations (principally corporations of non-investment grade rating). The fair value is determined through third-party pricing models that primarily utilize dealer quoted current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.
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Real estate - Consists of direct investments in the stock of publicly traded companies and investments in pooled funds that invest directly in real estate. The publicly traded companies are valued based on the closing price reported in an active market on which the individual securities are traded and as such are classified as Level 1. The pooled funds rely on appraisal-based valuations and as such are classified as Level 3.
Cash equivalents - Primarily certificates of deposit, commercial paper, and repurchase agreements.
Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.
Money market funds - Money market funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Other - These assets consist of private equity, private debt, insurance contracts primarily for international plans, futures contracts, and over-the-counter options. Investments in private equity and private debt are valued at net asset value or estimated fair value based on quarterly financial information received from the investment advisor, third party appraisal or general partner. These estimates incorporate factors such as contributions and distributions, market transactions, market comparables and performance multiples. Futures contracts and options are valued based on the closing prices of contracts or indices as available using third-party sources.
For additional information regarding fair value measurements, see Note 14.
Defined Contribution Plans
The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The total contributions related to these plans are charged to expense and are as follows:
(In millions)
2021$171 
2020111 
2019130 


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Note 10. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations and indemnity claims, tax audits, patent infringement, personal injuries, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
Environmental Contingencies
Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. The Company requires that its businesses be certified to ISO 14001, an international standard for environmental management systems. The Company routinely reviews EHS performance at each of its manufacturing facilities and continuously strives to improve its environmental footprint, including carbon, waste, water and related operational profiles consistent with our sustainability goals.
Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party under the United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. At the end of 2021, the Company was involved with a total of 115 sites worldwide, including the Superfund sites mentioned above, with none of these sites being individually significant to the Company.
Remediation activities, generally involving soil and/or groundwater contamination, include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility study, design and action planning, performance (where actions may range from monitoring, to removal of contaminants, to installation of longer-term remediation systems), and operation and maintenance of a remediation system. The extent of expected remediation activities and costs varies by site. A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. Actual results may differ from these estimates. At December 31, 2021 and 2020, the Company had an accrual totaling $99 million and $103 million, respectively, for these costs.
Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably possible to exceed the recorded liability by an amount that would have a material effect on its financial position, results of operations or cash flows.
Warranty Accruals
Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts. Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and other events when they are known and estimable. A summary of the current and long-term warranty accruals is as follows:
(In millions)202120202019
Balance at January 1$151 $187 $176 
Provision65 100 204 
Settled(112)(130)(175)
Warranty accruals from business acquisitions and other21 2 (2)
Warranty accruals reclassified to held for sale— (8)(16)
Balance at December 31$125 $151 $187 


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Note 11. INCOME TAXES
Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable.
Income (loss) before income taxes
(In millions)202120202019
Ireland$153 $(132)$(201)
Foreign2,743 1,878 2,792 
Total income before income taxes$2,896 $1,746 $2,591 
Income tax expense (benefit)
(In millions)202120202019
Current
Ireland$50 $15 $26 
Foreign730 441 410 
Total current income tax expense780 456 436 
Deferred
Ireland(2)— 3 
Foreign(28)(125)(61)
Total deferred income tax expense (benefit)(30)(125)(58)
Total income tax expense$750 $331 $378 
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate are as follows:
202120202019
Income taxes at the applicable statutory rate25.0 %25.0 %25.0 %
Ireland operations
Ireland tax on trading income(0.7)%(0.2)%(1.0)%
Nondeductible interest expense0.6 %2.7 %3.9 %
Ireland Other - net(0.2)%0.4 %0.1 %
Foreign operations
Tax impact on sale of businesses
9.1 %3.9 %— %
Earnings taxed at other than the applicable statutory tax rate(8.0)%(14.0)%(14.8)%
Other items(0.1)%1.6 %3.3 %
Worldwide operations
Adjustments to tax liabilities0.2 %(0.6)%(0.5)%
Adjustments to valuation allowances— %0.2 %(1.4)%
Effective income tax expense rate25.9 %19.0 %14.6 %
During 2021, income tax expense of $750 million was recognized (an effective tax rate of 25.9%) compared to income tax expense of $331 million in 2020 (an effective tax rate of 19.0%) and income tax expense of $378 million in 2019 (an effective tax rate of 14.6%). The increase in the effective tax rate from 19% in 2020 to 25.9% in 2021 was primarily due to the tax expense on the gain from the sale of the Hydraulics business in 2021 discussed in Note 2. The increase in the effective tax rate from 14.6% in 2019 to 19.0% in 2020 was primarily due to the tax expense on the gain from the sale of the Lighting business in 2020 discussed in Note 2, partially offset by a tax benefit on the restructuring charges discussed in Note 16.

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No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $29.9 billion at December 31, 2021, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. The cash that is permanently reinvested is typically used to expand operations either organically or through acquisitions. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.
Worldwide income tax payments, net of tax refunds, are as follows:
(In millions)
2021$753 
2020391 
2019425 
Deferred Income Tax Assets and Liabilities
Components of noncurrent deferred income taxes are as follows:
December 31
20212020
(In millions)Noncurrent assets and liabilitiesNoncurrent assets and liabilities
Accruals and other adjustments
Employee benefits$348 $553 
Depreciation and amortization(1,087)(1,101)
Other accruals and adjustments385 505 
Ireland income tax loss carryforwards1 1 
Foreign income tax loss carryforwards3,127 1,815 
Foreign income tax credit carryforwards263 309 
Valuation allowance for income tax loss and income tax credit carryforwards(3,139)(1,863)
Other valuation allowances(65)(67)
Total deferred income taxes(167)152 
Deferred income taxes reported as held for sale— 3 
Deferred income taxes$(167)$149 
In 2021, the Company recorded an increase of $1.5 billion in its deferred tax assets for foreign income tax loss carryforwards related to a tax deductible statutory adjustment in Luxembourg. The Company also recorded a corresponding increase in its valuation allowance for income tax loss carryforwards, since it does not believe that it is more likely than not that the net operating loss is realizable, resulting in no impact to the Consolidated Statements of Income.
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At December 31, 2021, Eaton Corporation plc and its foreign subsidiaries had income tax loss carryforwards and income tax credit carryforwards that are available to reduce future taxable income or tax liabilities. These carryforwards and their respective expiration dates are summarized below:
(In millions)2022
through
2026		2027
through
2031		2032
through
2036		2037
through
2046		Not
subject to
expiration		 
Valuation
allowance
Ireland income tax loss carryforwards$— $— $— $— $8 $— 
Ireland deferred income tax assets for income tax loss
   carryforwards		— — — — 1 (1)
Foreign income tax loss carryforwards363 7,335 7,061 299 2,301 — 
Foreign deferred income tax assets for income tax loss carryforwards
60 670 1,768 84 560 (2,982)
Foreign deferred income tax assets for income tax loss carryforwards after ASU 2013-11
47 668 1,768 84 560 (2,982)
Foreign income tax credit carryforwards
50 183 55 4 30 (156)
Foreign income tax credit carryforwards after ASU 2013-11
28 146 55 4 30 (156)
Recoverability of Deferred Income Tax Assets
Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards.
Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pre-tax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pre-tax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance.
Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.

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Unrecognized Income Tax Benefits
A summary of gross unrecognized income tax benefits is as follows:
(In millions)202120202019
Balance at January 1$1,036 $1,001 $913 
Increases and decreases as a result of positions taken during prior years
Transfers from valuation allowances6 — 15 
Other increases, including currency translation22 10 22 
Other decreases, including currency translation(10)(10)(10)
Increases related to acquired businesses12 7 — 
Increases as a result of positions taken during the current year75 58 80 
Decreases relating to settlements with tax authorities(11)(26)(16)
Decreases as a result of a lapse of the applicable statute of limitations(10)(4)(3)
Balance at December 31$1,120 $1,036 $1,001 
Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company evaluates and adjusts the amount of unrecognized income tax benefits based on changes in facts and circumstances. The Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4.
If all unrecognized income tax benefits were recognized, the net impact on the provision for income tax expense would be $755 million.
As of December 31, 2021 and 2020, Eaton had accrued approximately $128 million and $110 million, respectively, for the payment of worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense.
The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as the timing of finalizing resolutions of audit disputes through reaching settlement agreements or concluding litigation, or changes in law. Therefore, for the majority of Eaton’s unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change.
The Company believes that the final resolution of all the assessments discussed below will not have a material impact on its consolidated financial statements. The ultimate outcome of these matters cannot be predicted with certainty given the complex nature of tax controversies. Should the ultimate outcome of any one of these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct, and that its accrual of unrecognized income tax benefits is appropriate with respect to these matters.
Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. With only a few exceptions, including the tax years in Brazil and the United States discussed below, Eaton and its subsidiaries are no longer subject to examinations for years before 2014.
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Brazil Tax Years 2005-2012
During 2010, the Company received a tax assessment, which included interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. In 2018, the Company received an unfavorable result at the final tax administrative appeals level. In August 2021, the Company was notified of a recalculation from an original alleged tax deficiency of $23 million plus $65 million of interest and penalties to a revised alleged tax deficiency of $30 million plus $97 million of interest and penalties (translated at the December 31, 2021 exchange rate). During 2014, the Company received a tax assessment, which included interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues concerning the 2005 through 2008 tax years). In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $25 million plus $90 million of interest and penalties (translated at the December 31, 2021 exchange rate). The Company is challenging both of the assessments in the judicial system. Challenges in the judicial system are expected to take several years to resolve and require provision of certain assets as security for the alleged deficiencies. As of December 31, 2021, the Company pledged Brazilian real estate assets with net book value of $18 million and provided additional security in the form of three separate bonds totaling $96 million and a cash deposit of $17 million (translated at the December 31, 2021 exchange rate).
United States Tax Disputes
The United States Internal Revenue Service (IRS) typically audits large corporate taxpayers on a continuous basis, generally resulting in many open tax years if there are disputed tax positions upon completion of the audits. The IRS has completed its examination of the consolidated income tax returns of the Company’s United States subsidiaries (Eaton US) for 2005 through 2016 and the statuses of the various tax years are discussed below. The IRS has challenged certain tax positions of Eaton US, and the Company is attempting to resolve those issues in litigation and the IRS administrative process, as described in more detail below. The IRS is currently examining tax years 2017 through 2019, and the statute of limitations for those years is open until December 31, 2024. Tax years 2020 and later are subject to future examination by the IRS. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. The Eaton US tax positions challenged by the IRS are items that recur beyond the tax years for which the IRS has proposed adjustments. Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct. However, if there is a final unfavorable resolution of any of the issues discussed below, it may have a material adverse impact on the Company’s consolidated financial statements.
U.S. Tax Years 2005-2006
In 2011, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2005 and 2006 tax years (the 2005-06 Notice), which Eaton US contested in United States Tax Court. The 2005-06 Notice proposed assessments of $75 million in additional taxes plus $52 million in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed the 2005-2010 tax years. Eaton US has continued to apply the APA pricing methodology for 2011 through the current reporting period. Immediately prior to the 2005-06 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. The case in Tax Court involved whether the IRS improperly cancelled the APAs. On July 26, 2017, the Tax Court issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements. On May 24, 2021, the IRS filed a notice to appeal the Tax Court’s ruling to the United States Sixth Circuit Court of Appeals, and the appellate process is anticipated to be ongoing in 2022. Tax years 2005 and 2006 remain open until this matter is resolved.
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U.S. Tax Years 2007-2010
In 2014, the IRS issued a Statutory Notice of Deficiency for Eaton US for the 2007 through 2010 tax years (the 2007-10 Notice), which Eaton US contested in Tax Court. The 2007-10 Notice proposed assessments of $190 million in additional taxes plus $72 million in penalties, net of agreed credits and deductions. The proposed assessments pertain to: (i) the same transfer pricing issues and APA for which the Tax Court has issued its ruling during 2017 as noted above; and (ii) the separate proposed assessment noted below. The Company believes that the Tax Court’s ruling for tax years 2005-2006 will also be applicable to the 2007-2010 years. Following the issuance of the Tax Court’s ruling, Eaton and the IRS recognized that the ruling on the enforceability of the APA did not address a secondary issue regarding the transfer pricing for a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has agreed to the royalty rate as reported by Eaton US in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to apply the same royalty rate in the 2007-2010 years.
The 2007-10 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton US’s controlled foreign corporations. The Company believes that the proposed assessment is without merit and contested the matter in Tax Court. In October 2017, Eaton and the IRS both moved for partial summary judgment on this issue. On February 25, 2019, the Tax Court granted the IRS’s motion for partial summary judgment and denied Eaton’s. The Company intends to appeal the Tax Court’s partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The total potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition issue is not estimable until all matters in the open tax years have been resolved.
U.S. Tax Years 2011-2013
In 2018, the IRS completed its examination of Eaton US for tax years 2011 through 2013 and has proposed adjustments, including: (i) transfer pricing adjustments similar to those proposed in the 2005-06 and 2007-10 Notices for products manufactured in the Company’s facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S.; (ii) adjustments involving the recognition of income for several of Eaton US’s controlled foreign corporations, which is the same issue included in the 2007-10 Notice described above and subject to litigation in Tax Court; (iii) transfer pricing adjustments for products manufactured in one of the Company’s facilities in Mexico and sold to affiliated companies located in the U.S.; and (iv) adjustments challenging the appropriate interest rate on intercompany debt and amount of intercompany fees charged for financial guarantees on external debt. The Company is attempting to resolve certain of these issues in administrative appeals. However, if acceptable resolutions are not achieved, the Company will vigorously defend its positions through litigation, which if undertaken will likely take several years for final resolution. The statute of limitations on these tax years currently remains open until December 31, 2022.
U.S. Tax Years 2014-2016
In 2021, the IRS completed its examination of Eaton US for tax years 2014 through 2016 and has proposed adjustments, including: (i) transfer pricing adjustments similar to those proposed in the 2005-06 Notice, 2007-10 Notice, and in tax years 2011-2013 for products manufactured in the Company’s facilities in Puerto Rico, and the Dominican Republic and sold to affiliated companies located in the U.S.; (ii) transfer pricing adjustments similar to those proposed in tax years 2011-2013 for products manufactured in one of the Company’s facilities in Mexico and sold to affiliated companies located in the U.S.; and (iii) adjustments similar to those proposed in tax years 2011-2013 challenging the appropriate interest rate on intercompany debt and amount of intercompany fees charged for financial guarantees on external debt. On November 29, 2021, the case was formally assigned to administrative appeals, and the Company will attempt to resolve certain of the issues in this administrative forum. However, if acceptable resolutions are not achieved, the Company will vigorously defend its positions through litigation, which if undertaken will likely take several years for final resolution. The statute of limitations on these tax years currently remains open until December 31, 2022.


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Note 12. EATON SHAREHOLDERS' EQUITY
There are 750 million Eaton ordinary shares authorized ($0.01 par value per share), 398.8 million and 398.1 million of which were issued and outstanding at December 31, 2021 and 2020, respectively. Eaton's Memorandum and Articles of Association authorized 40 thousand deferred ordinary shares (€1.00 par value per share) and 10 thousand preferred A shares ($1.00 par value per share), all of which were issued and outstanding at December 31, 2021 and 2020, and 10 million serial preferred shares ($0.01 par value per share), none of which is outstanding at December 31, 2021 and 2020. At December 31, 2021, there were 10,447 holders of record of Eaton ordinary shares. Additionally, 14,835 current and former employees were shareholders through participation in the Eaton Savings Plan, the Eaton Personal Investment Plan, or the Eaton Puerto Rico Retirement Savings Plan.
On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $5.0 billion of ordinary shares (2019 Program). Under the 2019 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During 2021 and 2020, 0.9 million and 17.1 million ordinary shares, respectively, were repurchased under the 2019 Program in the open market at a total cost of $122 million and $1,608 million, respectively. On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $5.0 billion in repurchases to be made during the three-year period commencing on that date (2022 Program).
Eaton has deferral plans that permit certain employees and directors to defer a portion of their compensation. A trust contains $4 million and $3 million of ordinary shares and marketable securities at December 31, 2021 and 2020, respectively, to fund a portion of these liabilities. The marketable securities were included in Other assets and the ordinary shares were included in Shareholders' equity at historical cost.
On February 23, 2022, Eaton's Board of Directors declared a quarterly dividend of $0.81 per ordinary share, a 7% increase over the dividend paid in the fourth quarter of 2021. The dividend is payable on March 31, 2022 to shareholders of record on March 11, 2022.
Comprehensive Income (Loss)
Comprehensive income (loss) consists primarily of net income, currency translation and related hedging instruments, changes in unrecognized costs of pension and other postretirement benefits, and changes in the effective portion of open derivative contracts designated as cash flow hedges. The following table summarizes the pre-tax and after-tax amounts recognized in Comprehensive income (loss):
202120202019
(In millions)Pre-taxAfter-taxPre-taxAfter-taxPre-taxAfter-tax
Currency translation and related hedging instruments
Gain (loss) from currency translation and related hedging
   instruments		$(335)$(339)$154 $164 $15 $16 
Translation reclassified to earnings369 369 37 37 — — 
34 30 191 201 15 16 
Pensions and other postretirement benefits
Prior service credit (cost) arising during the year(1)(1)(1)(1)(2)(2)
Net gain (loss) arising during the year448 337 (263)(203)(294)(232)
Currency translation24 19 (48)(37)(16)(13)
Other— — (2)(1)— — 
Amortization of actuarial loss and prior service cost
   reclassified to earnings		183 140 221 169 148 117 
654 495 (93)(73)(164)(130)
Cash flow hedges
Gain (loss) on derivatives designated as cash flow hedges50 39 (60)(47)(33)(27)
Changes in cash flow hedges reclassified to earnings(3)(2)17 14 (5)(4)
47 37 (43)(33)(38)(31)
Other comprehensive income (loss) attributable to Eaton ordinary shareholders$735 $562 $55 $95 $(187)$(145)
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The changes in Accumulated other comprehensive loss are as follows:
(In millions)Currency translation and related hedging instrumentsPensions and other postretirement benefitsCash flow
hedges		Total
Balance at January 1, 2021$(2,647)$(1,481)$(67)$(4,195)
Other comprehensive income (loss) before
    reclassifications		(339)355 39 55 
Amounts reclassified from Accumulated other
   comprehensive loss (income)		369 140 (2)507 
Net current-period Other comprehensive
   income 		30 495 37 562 
Balance at December 31, 2021$(2,617)$(986)$(30)$(3,633)

The reclassifications out of Accumulated other comprehensive loss are as follows:
(In millions)December 31, 2021Consolidated Statements of
Income classification
Currency translation losses
Sale of business$(369)Gain on sale of businesses
Tax benefit— 
Total, net of tax(369)
Amortization of defined benefits pension and other
   postretirement benefits items
Actuarial loss and prior service cost(183)
1
Tax benefit43 
Total, net of tax(140)
Gains and (losses) on cash flow hedges
Currency exchange contracts(6)Net sales and Cost of products sold
Commodity contracts9 Cost of products sold
Tax expense(1)
Total, net of tax2 
Total reclassifications for the period$(507)
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 9 for additional information about defined benefits pension and other postretirement benefits items.
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Net Income Per Share Attributable to Eaton Ordinary Shareholders
A summary of the calculation of net income per share attributable to Eaton ordinary shareholders is as follows:
(In millions except for per share data)202120202019
Net income attributable to Eaton ordinary shareholders$2,144 $1,410 $2,211 
Weighted-average number of ordinary shares outstanding - diluted401.6 404.0 420.8 
Less dilutive effect of equity-based compensation2.9 1.8 1.8 
Weighted-average number of ordinary shares outstanding - basic398.7 402.2 419.0 
Net income per share attributable to Eaton ordinary shareholders
Diluted$5.34 $3.49 $5.25 
Basic5.38 3.51 5.28 
In 2021, all stock options were included in the calculation of diluted net income per share attributable to Eaton ordinary shareholders because they were all dilutive. In 2020 and 2019, 0.6 million and 0.8 million of stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.

Note 13. EQUITY-BASED COMPENSATION
Eaton recognizes equity-based compensation expense based on the grant date fair value of the award. Awards with service conditions or both service and market conditions are expensed over the period during which an employee is required to provide service in exchange for the award. Awards with both service and performance conditions are expensed over the period an employee is required to provide service based on the number of units for which achievement of the performance objective is probable. The Company estimates forfeitures as part of recording equity-based compensation expense.
Restricted Stock Units and Awards
Restricted stock units (RSUs) and restricted stock awards (RSAs) have been issued to certain employees and directors. The fair value of RSUs and RSAs are determined based on the closing market price of the Company’s ordinary shares at the date of grant. The RSUs entitle the holder to receive one ordinary share for each RSU upon vesting, generally over three years. RSAs are issued and outstanding at the time of grant, but remain subject to forfeiture until vested, generally over ten years. A summary of the RSU and RSA activity for 2021 is as follows:
(Restricted stock units and awards in millions)Number of restricted
stock units and awards		Weighted-average fair
value per unit and award
Non-vested at January 11.5 $85.09 
Granted0.6 132.69 
Vested(0.7)91.20 
Forfeited(0.1)105.68 
Non-vested at December 311.3 $104.86 
Information related to RSUs and RSAs is as follows:
(In millions)202120202019
Pre-tax expense for RSUs and RSAs$61 $58 $57 
After-tax expense for RSUs and RSAs48 46 45 
Fair value of vested RSUs and RSAs 92 75 103 
As of December 31, 2021, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $82 million, and the weighted-average period in which the expense is expected to be recognized is 2.7 years. Excess tax benefit for RSUs and RSAs totaled $5 million, $2 million and $3 million for 2021, 2020, and 2019, respectively.
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Performance Share Units
Performance share units (PSUs) have been issued to certain employees that vest based on the satisfaction of a three-year service period and total shareholder return relative to that of a group of peers. Awards earned at the end of the three-year vesting period range from 0% to 200% of the targeted number of PSUs granted based on the ranking of total shareholder return of the Company, assuming reinvestment of all dividends, relative to a defined peer group of companies. Equity-based compensation expense for these PSUs is recognized over the period during which an employee is required to provide service in exchange for the award. Upon vesting, dividends that have accumulated during the vesting period are paid on earned awards.
The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions. The principal assumptions utilized in valuing these PSUs include the expected stock price volatility (based on the most recent 3-year period as of the grant date) and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon bonds with a three-year maturity as of the grant date). A summary of the assumptions used in determining fair value of these PSUs is as follows:
202120202019
Expected volatility35 %21 %21 %
Risk-free interest rate0.20 %1.16 %2.42 %
Weighted-average fair value of PSUs granted$159.74 $121.01 $92.50 
A summary of these PSUs that vested is as follows:
(Performance share units in millions)202120202019
Percent payout189 %178 %130 %
Shares vested0.5 0.4 0.3 
A summary of the 2021 activity for these PSUs is as follows:
(Performance share units in millions)Number of performance
share units		Weighted-average fair
value per unit
Non-vested at January 10.5 $105.47 
Granted1
0.2 159.74 
Adjusted for performance results achieved2
0.2 92.50 
Vested(0.5)92.50 
Forfeited— — 
Non-vested at December 310.4 $139.00 
1 Performance shares granted assuming the Company will perform at target relative to peers.
2 Adjustments for the number of shares vested under the 2019 awards at the end of the three-year performance period ended December 31, 2021, being higher than the target number of shares.
Information related to PSUs is as follows:
(In millions)202120202019
Pre-tax expense for PSUs$26 $25 $21 
After-tax expense for PSUs21 20 17 
As of December 31, 2021, total compensation expense not yet recognized related to non-vested PSUs was $31 million and the weighted-average period in which the expense is to be recognized is 1.8 years. Excess tax benefit for PSUs totaled $6 million, $3 million and $1 million for 2021, 2020, and 2019, respectively.



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Stock Options
Under various plans, stock options have been granted to certain employees and directors to purchase ordinary shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or director is required to provide service.
The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of stock options is as follows:
202120202019
Expected volatility28 %24 %23 %
Expected option life in years6.56.66.6
Expected dividend yield3.0 %3.2 %3.2 %
Risk-free interest rate
0.0 to 1.5%
0.5 to 1.5%
1.9 to 2.6%
Weighted-average fair value of stock options granted$26.11 $15.55 $14.08 
A summary of stock option activity is as follows:
(Options in millions)Weighted-average
exercise price per option		OptionsWeighted-average
remaining
contractual life
in years		Aggregate
intrinsic
value
Outstanding at January 1, 2021$76.93 3.6 
Granted131.59 0.5 
Exercised74.11 (0.9)
Forfeited and canceled— — 
Outstanding at December 31, 2021$85.34 3.2 6.3$277.9 
Exercisable at December 31, 2021$73.31 2.1 5.2$206.9 
Reserved for future grants at December 31, 202122.4 
The aggregate intrinsic value in the table above represents the total excess of the $172.82 closing price of Eaton ordinary shares on the last trading day of 2021 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's ordinary shares.
Information related to stock options is as follows:
(In millions)202120202019
Pre-tax expense for stock options$14 $9 $9 
After-tax expense for stock options11 7 7 
Proceeds from stock options exercised63 70 67 
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated
   Statements of Cash Flows		13 10 4 
Intrinsic value of stock options exercised69 50 29 
Total fair value of stock options vested$14 $9 $9 
Stock options exercised0.9 1.1 1.2 
As of December 31, 2021, total compensation expense not yet recognized related to non-vested stock options was $11 million, and the weighted-average period in which the expense is expected to be recognized is 1.8 years.
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Note 14. FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments recognized at fair value, and the fair value measurements used, is as follows:
(In millions)TotalQuoted prices
in active
markets for
identical assets
(Level 1)		Other
observable
inputs
(Level 2)		Unobservable
inputs
(Level 3)
2021    
Cash$297 $297 $— $— 
Short-term investments271 271 — — 
Net derivative contracts41 — 41 — 
Contingent consideration from acquisition of Green Motion (Note 2)(57)— — (57)
2020    
Cash$438 $438 $— $— 
Short-term investments664 664 — — 
Net derivative contracts31 — 31 — 
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.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $8,566 million and fair value of $9,232 million at December 31, 2021 compared to $8,057 million and $9,075 million, respectively, at December 31, 2020. The fair value of Eaton's debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
Short-Term Investments
Eaton invests excess cash generated from operations in short-term marketable investments. Investments in marketable equity securities are valued at the closing price of the shares. All other short-term investments are at carrying value, which approximates the fair value due to the short-term maturities of these investments. A summary of short-term investments is as follows:
December 31
(In millions)20212020
Time deposits and certificates of deposit with banks$221 $168 
Money market investments43 496 
Investments in marketable equity securities7 — 
Total short-term investments$271 $664 

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Note 15. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
•Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
•Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
•Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Consolidated Statements of Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $2,880 million and $2,020 million at December 31, 2021 and 2020, respectively. See Note 8 for additional information about debt.
Interest Rate Risk
Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk of certain long-term debt. These interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt in Note 8. Eaton also entered into several forward starting floating-to-fixed interest rate swaps to manage interest rate risk on a future anticipated debt issuance.
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A summary of interest rate swaps outstanding at December 31, 2021, is as follows:
Fixed-to-Floating Interest Rate Swaps
(Notional amount in millions)
Notional amountFixed interest
rate received		Floating interest
rate paid		Basis for contracted floating interest rate paid
$100 8.10%6.00%
1 month LIBOR + 5.90%
1,400 2.75%0.69%
1 month LIBOR + 0.58%
200 3.68%1.17%
1 month LIBOR + 1.07%
25 7.63%2.66%
6 month LIBOR + 2.48%
50 7.65%2.77%
6 month LIBOR + 2.57%
25 5.45%0.46%
6 month LIBOR + 0.28%

Forward Starting Floating-to-Fixed Interest Rate Swaps
(Notional amount in millions)
Notional amountFloating interest
rate to be received		Fixed interest
rate to be paid		Basis for contracted floating interest rate received
$50 —%3.10%
3 month LIBOR + 0.00%
50 —%3.06%
3 month LIBOR + 0.00%
50 —%2.80%
3 month LIBOR + 0.00%
50 —%2.81%
3 month LIBOR + 0.00%
50 —%2.64%
3 month LIBOR + 0.00%
50 —%2.64%
3 month LIBOR + 0.00%
50 —%2.30%
3 month LIBOR + 0.00%
50 —%2.08%
3 month LIBOR + 0.00%
50 —%1.77%
3 month LIBOR + 0.00%
50 —%1.51%
3 month LIBOR + 0.00%
50 —%1.50%
3 month LIBOR + 0.00%
50 —%1.20%
3 month LIBOR + 0.00%
50 —%1.14%
3 month LIBOR + 0.00%
50 —%0.81%
3 month LIBOR + 0.00%
50 —%1.24%
3 month LIBOR + 0.00%
50 —%1.31%
3 month LIBOR + 0.00%
50 —%0.71%
3 month LIBOR + 0.00%
50 —%0.78%
3 month LIBOR + 0.00%
50 —%1.79%
3 month LIBOR + 0.00%
50 —%1.76%
3 month LIBOR + 0.00%
50 —%1.75%
3 month LIBOR + 0.00%
100 —%1.83%
3 month LIBOR + 0.00%
50 —%1.65%
3 month LIBOR + 0.00%
50 —%1.56%
3 month LIBOR + 0.00%
50 —%1.66%
3 month LIBOR + 0.00%
50 —%1.69%
3 month LIBOR + 0.00%


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Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets is as follows:
(In millions)Notional
amount		Other
 current
assets		Other
noncurrent
assets		Other
current
liabilities		Other
noncurrent
liabilities		Type of
hedge		Term
December 31, 2021      
Derivatives designated as hedges      
Fixed-to-floating interest rate swaps$1,800 $22 $29 $— $— Fair value
8 months to
13 years
Forward starting floating-to-fixed interest rate swaps
1,350 — 38 — 79 Cash flow
11 to 31 years
Currency exchange contracts1,212 17 2 11 3 Cash flow
1 to 36 months
Commodity contracts50 2 — 1 — Cash flow
1 to 12 months
Total $41 $69 $12 $82  
Derivatives not designated as hedges     
Currency exchange contracts$5,285 $34  $9  
1 to 12 months
Commodity contracts62 1  1  1 month
Total $35  $10   
December 31, 2020      
Derivatives designated as hedges      
Fixed-to-floating interest rate swaps$2,075 $2 $100 $— $— Fair value
6 months to
14 years
Forward starting floating-to-fixed interest rate swaps
900 — 17 — 108 Cash flow
12 to 32 years
Currency exchange contracts946 20 6 20 1 Cash flow
1 to 36 months
Commodity contracts24 4 — — — Cash flow
1 to 12 months
Total $26 $123 $20 $109   
Derivatives not designated as hedges      
Currency exchange contracts$5,227 $43  $34  
1 to 12 months
Commodity contracts18 2  —  
1 month
Total $45  $34   
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts. The cash flows resulting from the settlement of these derivatives have been classified in investing activities in the Consolidated Statement of Cash Flows.
As of December 31, 2021, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
CommodityDecember 31, 2021Term
Copper9 Millions of pounds
1 to 12 months
Gold1,402 Troy ounces
1 to 12 months
Silver412,300 Troy ounces
1 to 12 months
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The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
(In millions)Carrying amount of the hedged assets (liabilities)
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged asset (liabilities) (a)
Location on Consolidated Balance SheetsDecember 31, 2021December 31, 2020December 31, 2021December 31, 2020
Long-term debt$(2,413)$(2,688)$(84)$(139)
(a) At December 31, 2021 and 2020, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $33 million and $37 million, respectively.
The impact of hedging activities to the Consolidated Statements of Income is as follows:
2021
(In millions)Net salesCost of products soldInterest expense - net
Amounts from Consolidated Statements of Income$19,628 $13,293 $144 
Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item$6 $— $— 
Derivative designated as hedging instrument(6)— — 
Commodity contracts
Hedged item$— $(9)$— 
Derivative designated as hedging instrument— 9 — 
Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item$— $— $51 
Derivative designated as hedging instrument— — (51)
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2020
(In millions)Net salesCost of products soldInterest expense - net
Amounts from Consolidated Statements of Income$17,858 $12,408 $149 
Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item$13 $5 $— 
Derivative designated as hedging instrument(13)(5)— 
Commodity contracts
Hedged item$— $(1)$— 
Derivative designated as hedging instrument— 1 — 
Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item$— $— $(45)
Derivative designated as hedging instrument— — 45 
2019
(In millions)Net salesCost of products soldInterest expense - net
Amounts from Consolidated Statements of Income$21,390 $14,338 $199 
Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item$7 $(12)$— 
Derivative designated as hedging instrument(7)12 — 
Commodity contracts
Hedged item$— $— $— 
Derivative designated as hedging instrument— — — 
Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item$— $— $(62)
Derivative designated as hedging instrument— — 62 

The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:
Gain (loss) recognized in Consolidated Statements of IncomeConsolidated Statements of Income classification
(In millions)202120202019
Gain (loss) on derivatives not designated as hedges 
Currency exchange contracts$— $72 $73 Interest expense - net
Commodity Contracts11 4 — Cost of products sold
Total$11 $76 $73 
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The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements of Income and Comprehensive Income is as follows:
 Gain (loss) recognized in
other comprehensive
(loss) income
(In millions)202120202019
Derivatives designated as cash flow hedges  
Forward starting floating-to-fixed interest rate swaps$50 $(52)$(36)
Currency exchange contracts(6)(13)3 
Commodity contracts6 5 — 
Non-derivative designated as net
   investment hedges		  
Foreign currency denominated debt240 (173)15 
Total$290 $(233)$(18)
 Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss		Gain (loss) reclassified
from Accumulated other
comprehensive loss
(In millions)202120202019
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swapsInterest expense - net$— $— $— 
Currency exchange contractsNet sales and Cost of products sold(6)(18)5 
Commodity contractsCost of products sold9 1 — 
Non-derivative designated as net
   investment hedges
Foreign currency denominated debtInterest expense - net— — — 
Total$3 $(17)$5 

At December 31, 2021, a gain of $8 million of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.

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Note 16. RESTRUCTURING CHARGES
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $292 million. These restructuring activities are expected to incur additional expenses of $28 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $320 million for the entire program.
A summary of restructuring program charges is as follows:
(In millions except per share data)20212020
Workforce reductions$21 $172 
Plant closing and other57 42 
Total before income taxes78 214 
Income tax benefit18 44 
Total after income taxes$60 $170 
Per ordinary share - diluted$0.15 $0.42 

Restructuring program charges related to the following segments:
(In millions)20212020
Electrical Americas$14 $18 
Electrical Global18 55 
Aerospace8 34 
Vehicle21 102 
eMobility1 1 
Corporate16 4 
Total
$78 $214 
A summary of liabilities related to workforce reductions, plant closing and other associated costs is as follows:
(In millions)Workforce reductionsPlant closing and otherTotal
Balance at January 1, 2020$— $— $— 
  Liability recognized172 42 214 
  Payments, utilization and translation(33)(39)(72)
Balance at December 31, 2020$139 $3 $142 
Liability recognized
21 57 78 
Payments, utilization and translation(64)(52)(116)
Balance at December 31, 2021$96 $8 $104 
These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 17 for additional information about business segments.
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Note 17. BUSINESS SEGMENT AND GEOGRAPHIC REGION 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 segments are as follows:
Electrical Americas and Electrical Global
The Electrical Americas segment consists of electrical components, industrial components, power distribution and assemblies, residential products, single phase power quality and connectivity, three phase power quality, wiring devices, circuit protection, utility power distribution, power reliability equipment, and services that are primarily produced and sold in North and South America. The Electrical Global segment consists of electrical components, industrial components, power distribution and assemblies, single phase and three phase power quality, and services that are primarily produced and sold outside of North and South America; as well as hazardous duty electrical equipment, emergency lighting, fire detection, intrinsically safe explosion-proof instrumentation, and structural support systems that are produced and sold globally. The principal markets for these segments are industrial, institutional, governmental, utility, commercial, residential and information technology. These products are used wherever there is a demand for electrical power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories, utilities, and industrial and energy facilities. The segments share certain common global customers, but a large number of customers are located regionally. Sales are made through distributors, resellers, and manufacturers' representatives, as well as directly to original equipment manufacturers, utilities, and certain other end users.
Hydraulics
On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S. The Hydraulics business sold hydraulics components, systems and services for industrial and mobile equipment. The Hydraulics business offered a wide range of power products including pumps, motors and hydraulic power units; a broad range of controls and sensing products including valves, cylinders and electronic controls; a full range of fluid conveyance products including industrial and hydraulic hose, fittings, and assemblies, thermoplastic hose and tubing, couplings, connectors, and assembly equipment; industrial drum and disc brakes. Historically, the principal markets for the Hydraulics business included renewable energy, marine, agriculture, oil and gas, construction, mining, forestry, utility, material handling, truck and bus, machine tools, molding, primary metals, and power generation. Key manufacturing customers in these markets and other customers were located globally. Products were sold and serviced through a variety of channels.
Aerospace
The Aerospace segment is a leading global supplier of aerospace fuel, hydraulics, and pneumatic systems for commercial and military use, as well as filtration systems for industrial applications. Products include hydraulic power generation systems for aerospace applications including pumps, motors, hydraulic power units, hose and fittings, electro-hydraulic pumps; controls and sensing products including valves, cylinders, electronic controls, electromechanical actuators, sensors, aircraft flap and slat systems and nose wheel steering systems; fluid conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing and ducting; fuel systems including air-to-air refueling systems, fuel pumps, fuel inerting products, sensors, valves, adapters and regulators; mission systems including oxygen generation system, payload carriages, and thermal management products; high performance interconnect products including wiring connectors and cables. The Aerospace segment also includes filtration systems including hydraulic filters, bag filters, strainers and cartridges; and golf grips. The principal markets for the Aerospace segment are manufacturers of commercial and military aircraft and related after-market customers, as well as industrial applications. These manufacturers and other customers operate globally. Products are sold and serviced through a variety of channels.
Vehicle
The Vehicle segment is a leader in the design, manufacture, marketing, and supply of: drivetrain, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks, and commercial vehicles. Products include transmissions and transmission components, clutches, hybrid power systems, superchargers, engine valves and valve actuation systems, locking and limited slip differentials, transmission controls, and fuel vapor components for the global vehicle industry. The principal markets for the Vehicle segment are original equipment manufacturers and aftermarket customers of heavy-, medium-, and light-duty trucks, SUVs, CUVs, passenger cars and agricultural equipment.
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eMobility
The eMobility segment designs, manufactures, markets, and supplies mechanical, electrical, and electronic components and systems that improve the power management and performance of both on-road and off-road vehicles. Products include high voltage inverters, converters, fuses, onboard chargers, circuit protection units, vehicle controls, power distribution, fuel tank isolation valves, and commercial vehicle hybrid systems. The principle markets for the eMobility segment are original equipment manufacturers and aftermarket customers of passenger cars, commercial vehicles, and construction, agriculture, and mining equipment.
Other Information
No single customer represented greater than 10% of net sales in 2021, 2020 or 2019, respectively.
The accounting policies of the business segments are generally the same as the policies described in Note 1, except that, as described further in the following paragraph, certain items are not allocated to the businesses. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties. These intersegment sales are eliminated in consolidation. Operating profit includes the operating profit from intersegment sales.
Corporate includes all the Company's amortization of intangible assets, interest expense-net and restructuring program costs (Note 16) and the non-service cost portion of pensions and other postretirement benefits expense. Other expense-net includes all the Company's costs associated with acquisitions, divestitures, and gains and losses on the sale of certain businesses and other items that are of a corporate or functional governance nature. For purposes of business segment performance measurement, a portion of corporate costs, excluding amortization of intangibles assets, acquisition integration and divestiture costs, and restructuring program charges, are allocated to the businesses. These allocations are periodically adjusted to pass on year-over-year cost savings or increases to the businesses in a manner that is consistent with how the chief operating decision maker assesses performance. Identifiable assets of the business segments exclude goodwill, other intangible assets, and general corporate assets, which principally consist of certain cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.
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Business Segment Information
(In millions)202120202019
Net sales
Electrical Americas$7,242 $6,680 $8,175 
Electrical Global5,516 4,703 5,172 
Hydraulics1,300 1,842 2,204 
Aerospace2,648 2,223 2,480 
Vehicle2,579 2,118 3,038 
eMobility343 292 321 
Total net sales$19,628 $17,858 $21,390 
Segment operating profit (loss)
Electrical Americas$1,495 $1,352 $1,549 
Electrical Global1,034 750 897 
Hydraulics177 186 193 
Aerospace580 414 595 
Vehicle449 243 460 
eMobility(29)(8)17 
Total segment operating profit3,706 2,937 3,711 
Corporate
Intangible asset amortization expense(444)(354)(367)
Interest expense - net(144)(149)(199)
Pension and other postretirement benefits income (expense)65 (40)(12)
Restructuring program charges(78)(214)— 
Other expense - net(209)(434)(542)
Income before income taxes2,896 1,746 2,591 
Income tax expense750 331 378 
Net income2,146 1,415 2,213 
Less net income for noncontrolling interests(2)(5)(2)
Net income attributable to Eaton ordinary shareholders$2,144 $1,410 $2,211 

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(In millions)202120202019
Identifiable assets
Electrical Americas$3,002 $2,333 $2,360 
Electrical Global2,579 2,334 2,319 
Hydraulics— — 1,293 
Aerospace1,729 1,363 1,562 
Vehicle1,985 1,950 2,145 
eMobility220 180 141 
Total identifiable assets9,515 8,160 9,820 
Goodwill14,751 12,903 13,456 
Other intangible assets5,855 4,175 4,638 
Corporate3,906 4,099 3,514 
Assets held for sale— 2,487 1,377 
Total assets$34,027 $31,824 $32,805 
Capital expenditures for property, plant and equipment
Electrical Americas$180 $95 $160 
Electrical Global120 71 106 
Hydraulics34 41 80 
Aerospace78 59 61 
Vehicle112 77 127 
eMobility27 24 8 
Total551 367 542 
Corporate24 22 45 
Total expenditures for property, plant and equipment$575 $389 $587 
Depreciation of property, plant and equipment
Electrical Americas$105 $101 $118 
Electrical Global97 94 93 
Hydraulics— — 58 
Aerospace69 53 37 
Vehicle95 98 102 
eMobility8 6 5 
Total374 352 413 
Corporate52 56 52 
Total depreciation of property, plant and equipment$426 $408 $465 
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Geographic Region Information
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and equipment - net.
(In millions)202120202019
Net sales
United States$10,868 $10,044 $12,336 
Canada797 757 941 
Latin America1,160 939 1,312 
Europe4,276 3,818 4,311 
Asia Pacific2,527 2,300 2,490 
Total$19,628 $17,858 $21,390 
Long-lived assets
United States$1,593 $1,510 $1,821 
Canada25 25 24 
Latin America277 249 316 
Europe701 738 797 
Asia Pacific468 442 538 
Total$3,064 $2,964 $3,496 

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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 an intelligent power management company dedicated to improving the quality of life and protecting the environment for people everywhere. We are guided by our commitment to do business right, to operate sustainably and to help our customers manage power – today and well into the future. By capitalizing on the global growth trends of electrification and digitalization, we're accelerating the planet's transition to renewable energy, helping to solve the world's most urgent power management challenges, and doing what's best for our stakeholders and all of society.
Eaton’s businesses are well-positioned to take advantage of secular growth trends related to the energy transition from fossil fuels to renewables. We are responding to these trends by innovating solutions that transform the electrical power value chain, investing in electrical vehicle markets, increasing our focus on electrification, and employing digital technologies for power management. The Company’s innovations are expected to enable the integration of renewables and sustainability solutions, with new types of equipment, services, and software. These strategic focus areas are an important part of our response to climate change.
Founded in 1911, Eaton has been listed on the New York Stock Exchange for nearly a century. We reported revenues of $19.6 billion in 2021 and serve customers in more than 170 countries.

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Portfolio Changes
The Company continues to actively manage its portfolio of businesses to deliver on its strategic objectives. The Company is focused on deploying its capital toward businesses that provide opportunities for above-market growth, strong returns, and align with secular trends and its power management strategies. Over the last three years, Eaton has completed a number of transactions to strengthen its portfolio.
Acquisitions of businesses and investments in associate companiesDate of acquisitionBusiness segment
Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S.
April 15, 2019Electrical Global
93.7 percent controlling interest in a leading manufacturer of electrical switchgear with a primary focus on medium voltage solutions for industrial and utility customers.
Innovative Switchgear Solutions, Inc.
July 19, 2019Electrical Americas
A specialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets.
Souriau-Sunbank Connection Technologies
December 20, 2019Aerospace
A global leader in highly engineered electrical interconnect solutions for harsh environments in the aerospace, defense, industrial, energy, and transport markets.
Power Distribution, Inc.
February 25, 2020Electrical Americas
A leading supplier of mission critical power distribution, static switching, and power monitoring equipment and services for data centers and industrial and commercial customers.
Tripp LiteMarch 17, 2021Electrical Americas
A leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas.
Green Motion SAMarch 22, 2021Electrical Global
A leading designer and manufacturer of electric vehicle charging hardware and related software.
HuanYu High TechMarch 29, 2021Electrical Global
A 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region.
Cobham Mission SystemsJune 1, 2021Aerospace
A leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets.
Jiangsu YiNeng Electric's busway businessJune 25, 2021Electrical Global
A 50 percent stake in Jiangsu YiNeng Electric's busway business which manufactures and markets busway products in China.
Royal Power SolutionsJanuary 5, 2022eMobility
A manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets.
Divestitures of businessesDate of divestitureBusiness segment
Automotive Fluid Conveyance business
December 31, 2019Vehicle
Lighting business
March 2, 2020Electrical Americas
Hydraulics business
August 2, 2021Hydraulics
Additional information related to acquisitions and divestitures of businesses is presented in Note 2.
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Restructuring
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $292 million. These restructuring activities are expected to incur additional expenses of $28 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $320 million for the entire program. The projected mature year savings from these restructuring actions are expected to be $230 million when fully implemented in 2023. Additional information related to this restructuring is presented in Note 16.
Summary of Results of Operations
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted is as follows:
(In millions except for per share data)202120202019
Net sales$19,628 $17,858 $21,390 
Net income attributable to Eaton ordinary shareholders2,144 1,410 2,211 
Net income per share attributable to Eaton ordinary shareholders - diluted$5.34 $3.49 $5.25 
During 2019, the Company’s results of operations were impacted by negative currency translation and weaker than expected growth in the Company’s end markets, particularly in the second half of 2019. Despite the declining market conditions and unfavorable impact of currency translation, the Company generated solid operating margins and Net income per ordinary share.
During 2020, the Company's results of operations were impacted by the COVID-19 pandemic. Organic sales were down 11% in 2020 primarily due to the impact from the COVID-19 pandemic. The divestitures of the Lighting and Automotive Fluid Conveyance businesses reduced sales, which was partially offset by growth from the acquisitions of Souriau-Sunbank Connection Technologies (Souriau-Sunbank) and Power Distribution, Inc.
During 2021, the Company's organic sales increased 10% as end-markets and regions served by our business segments have largely recovered from the negative impact of the COVID-19 pandemic. Our Electrical Global, Vehicle and eMobility business segments all realized organic growth greater than 10% during the year. This level of organic growth was achieved despite supply chain constraints limiting the availability of materials in select businesses, travel restrictions continuing to impact commercial aviation, and reduced production levels at our customers leading to historic low vehicle inventory. Additionally, over the past several years, Eaton has completed a number of transactions to add higher growth, better margin businesses to its portfolio. These portfolio updates, along with continued improvements in supply chains and recovery of the Aerospace and Vehicle markets from the pandemic, have the Company better aligned with secular growth trends and well positioned for expected further growth.

COVID-19
The Company has been impacted by the COVID-19 pandemic in select markets and industries. As a result, our businesses have been focused on cost control measures where appropriate to offset the volume declines we experienced in addition to executing on our multi-year restructuring program we decided to undertake in the second quarter of 2020. In 2021, the Company has seen broad-based strength in its end-markets and regions as our businesses have largely recovered from the negative impact of the COVID-19 pandemic. However as global economies recover, many of our businesses have been impacted by supply chain disruptions, inflation and labor shortages. Additionally, our Aerospace business segment continues to see some softness in demand due to the impact of continued travel restrictions on commercial aviation, particularly in international travel.
Eaton's products and support services are vital to hospitals, emergency services, military sites, utilities, public works, transportation, and shipping providers. In addition, data centers, retail outlets, airports, and governments, as well as the networks that support schools and remote workers, rely on the Company's products to serve their customers and communities. As a result, the Company's plants are generally not subject to extended shutdowns.
The Company continues to monitor the pandemic’s impact throughout the world, including guidance from governmental authorities and world health organizations. The Company’s actions to protect the safety and health of its workforce are aligned with its preventive health protocols and those of governmental authorities and health organizations including the Centers for Disease Controls (U.S.) and the World Health Organization.

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RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results includes certain non-GAAP financial measures. These financial measures include adjusted earnings and adjusted earnings per ordinary share, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the Consolidated Financial Results table below. During the first quarter of 2021, the Company revised its definition of adjusted earnings to exclude intangible asset amortization expense and prior periods have been retrospectively adjusted to apply this change. Management believes that these financial measures are useful to investors because they exclude certain transactions, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton.

Acquisition and Divestiture Charges
Eaton incurs integration charges and transaction costs to acquire and integrate businesses, and transaction, separation and other costs to divest and exit businesses. Eaton also recognizes gains and losses on the sale of businesses. A summary of these Corporate items is as follows:
(In millions except for per share data)202120202019
Acquisition integration, divestiture charges and transactions costs$349 $288 $198 
Gain on the sale of the Hydraulics and Lighting businesses(617)(221)— 
Total charges (income) before income taxes(268)67 198 
Income tax expense (benefit)362 66 (24)
Total after income taxes$94 $133 $174 
Per ordinary share - diluted$0.23 $0.33 $0.42 
Acquisition integration, divestiture charges and transaction costs in 2021 are primarily related to the divestiture of the Hydraulics business, the acquisitions of Tripp Lite, Cobham Mission Systems, Souriau-Sunbank Connection Technologies, and Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., and other charges to acquire and exit businesses including certain indemnity claims associated with the sale of 50% interest in the commercial vehicle automated transmission business in 2017. Charges in 2020 are primarily related to the divestitures of the Hydraulics business and the Lighting business, the acquisitions of Souriau-Sunbank, Ulusoy Elektrik, and Power Distribution, Inc., and other charges to exit businesses. Charges in 2019 related to the divestiture of the Lighting business, the acquisitions of Ulusoy Elektrik, ISG, and Souriau-Sunbank, the loss on the sale of the Automotive Fluid Conveyance business, and other charges to exit businesses. These charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, Interest expense - net, or Other expense - net. In Business Segment Information in Note 17, the charges were included in Other expense - net.
Intangible Asset Amortization Expense
Intangible asset amortization expense is as follows:
(In millions except for per share data)202120202019
Intangible asset amortization expense$444 $354 $367 
Income tax benefit83 82 84 
Total after income taxes$361 $272 $283 
Per ordinary share - diluted$0.90 $0.67 $0.67 
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Consolidated Financial Results
(In millions except for per share data)2021Change
from 2020		2020Change
from 2019		2019
Net sales$19,628 10 %$17,858 (17)%$21,390 
Gross profit6,335 16 %5,450 (23)%7,052 
Percent of net sales32.3 %30.5 %33.0 %
Income before income taxes2,896 66 %1,746 (33)%2,591 
Net income2,146 52 %1,415 (36)%2,213 
Less net income for noncontrolling interests(2)(5)(2)
Net income attributable to Eaton ordinary shareholders2,144 52 %1,410 (36)%2,211 
Excluding acquisition and divestiture charges, after-tax94 133 174 
Excluding restructuring program charges, after-tax60 170 — 
Excluding intangible asset amortization expense, after-tax361 272 283 
Adjusted earnings$2,659 34 %$1,985 (26)%$2,668 
Net income per share attributable to Eaton ordinary shareholders - diluted
$5.34 53 %$3.49 (34)%$5.25 
Excluding per share impact of acquisition and divestiture charges, after-tax0.23 0.33 0.42 
Excluding per share impact of restructuring program charges, after-tax0.15 0.42 — 
Excluding per share impact of intangible asset amortization expense, after-tax0.90 0.67 0.67 
Adjusted earnings per ordinary share$6.62 35 %$4.91 (23)%$6.34 
Net Sales
Changes in Net sales are summarized as follows:
2021
2020
Organic growth10 %(11)%
Acquisitions of businesses
5 %2 %
Divestitures of businesses(6)%(7)%
Foreign currency1 %(1)%
Total increase (decrease) in Net sales10 %(17)%
Organic sales increased 10% in 2021 due to broad-based strength in end-markets and regions as our business segments have largely recovered from the negative impact of the COVID-19 pandemic. This organic growth was achieved despite the supply chain constraints experienced by the Electrical Americas business segment, and customers of the Vehicle and eMobility business segments also experienced supply chain constraints leading to reduced production levels. Additionally, organic sales in the Aerospace business segment continued to be impacted by travel restrictions from the COVID-19 pandemic on commercial aviation. The decrease in organic sales in 2020 was primarily due to the impact from the COVID-19 pandemic, with lower sales in all business segments.
The acquisitions of Tripp Lite and Cobham Mission Systems increased sales in 2021, while the divestitures of the Hydraulics and Lighting businesses reduced sales.
Gross Profit
Gross profit margin increased from 30.5% in 2020 to 32.3% in 2021 primarily due to higher sales volumes and savings from restructuring actions. Organic sales volumes improved in the Electrical Americas, Electrical Global, and Vehicle business segments, and declined in the Aerospace business segment. Gross profit also improved due to the net impact of the acquisitions of Tripp Lite and Cobham Mission Systems and the divestiture of the Hydraulics business. Conversely, commodity and logistics inflation had an unfavorable impact on gross margin during 2021. Gross profit margin decreased from 33.0% in 2019 to 30.5% in 2020 primarily due to the impact from the COVID-19 pandemic, with lower sales in all business segments.
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Income Taxes
During 2021, income tax expense of $750 million was recognized (an effective tax rate of 25.9%) compared to income tax expense of $331 million in 2020 (an effective tax rate of 19.0%) and income tax expense of $378 million in 2019 (an effective tax rate of 14.6%). The increase in the effective tax rate from 19.0% in 2020 to 25.9% in 2021 was primarily due to the tax expense on the gain from the sale of the Hydraulics business in 2021 discussed in Note 2. The increase in the effective tax rate from 14.6% in 2019 to 19.0% in 2020 was primarily due to the tax expense on the gain from the sale of the Lighting business in 2020 discussed in Note 2, partially offset by a tax benefit on the restructuring charges discussed in Note 16. Additionally, see Note 11 for income tax rate reconciliations from Ireland's national statutory rate to the consolidated effective rate.
Net Income
Net income attributable to Eaton ordinary shareholders of $2,144 million in 2021 increased 52% compared to $1,410 million in 2020. Net income in 2021 and 2020 included after-tax gains of $197 million on the sale of the Hydraulics business and $91 million on the sale of the Lighting business, respectively. Excluding these gains, the increase in 2021 net income was primarily due to higher gross profit and lower restructuring program charges, partially offset by higher income tax expense, acquisition and divestiture charges, and intangible asset amortization expense. Net income attributable to Eaton ordinary shareholders of $1,410 million in 2020 decreased 36% compared to $2,211 million in 2019. Net income in 2020 included an after-tax gain of $91 million on the sale of the Lighting business. The decrease in 2020 net income was primarily due to lower sales volumes as a result of the COVID-19 pandemic.
Net income per ordinary share increased to $5.34 in 2021 compared to $3.49 in 2020. Net income per ordinary share in 2021 and 2020 included $0.49 and $0.22 from the sale of the Hydraulics and Lighting businesses, respectively. Excluding these gains, the increase in Net income per ordinary share in 2021 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past two years. Net income per ordinary share decreased to $3.49 in 2020 compared to $5.25 in 2019. The decrease in Net income per ordinary share in 2020 was due to lower Net income attributable to Eaton ordinary shareholders, adjusted for the impact of the Company's share repurchases over the past few years.
Adjusted Earnings
Adjusted earnings of $2,659 million in 2021 increased 34% compared to Adjusted earnings of $1,985 million in 2020. The increase in Adjusted earnings in 2021 was primarily due to higher Net income attributable to Eaton ordinary shareholders, adjusted for acquisition and divestiture charges, restructuring program charges, and intangible asset amortization expense. Adjusted earnings of $1,985 million in 2020 decreased 26% compared to Adjusted Earnings of $2,668 million in 2019. The decrease in Adjusted earnings in 2020 was primarily due to lower Net income attributable to Eaton ordinary shareholders, adjusted for acquisition and divestiture charges, and restructuring program charges.
Adjusted earnings per ordinary share increased to $6.62 in 2021 compared to $4.91 in 2020. The increase in Adjusted earnings per ordinary share in 2021 was due to higher Adjusted earnings and the impact of the Company's share repurchases over the past two years. Adjusted earnings per ordinary share decreased to $4.91 in 2020 compared to $6.34 in 2019. The decrease in Adjusted earnings per ordinary share in 2020 was due to lower Adjusted earnings, adjusted for the impact of the Company's share repurchases over the past few years.


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Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating profit margin by business segment.
Electrical Americas
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net sales$7,242 8 %$6,680 (18)%$8,175 
Operating profit$1,495 11 %$1,352 (13)%$1,549 
Operating margin20.6 %20.2 %18.9 %
Changes in Net sales are summarized as follows:
2021
2020
Organic growth5 %(2)%
Acquisitions of Tripp Lite, Power Distribution, Inc., and Innovative Switchgear Solutions, Inc.
7 %1 %
Divestiture of the Lighting business(4)%(17)%
Total increase (decrease) in Net sales8 %(18)%
The increase in organic sales in 2021 was primarily due to broad-based strength in end-markets as they have largely recovered from the COVID-19 pandemic with particular strength in residential and data centers, partially offset by weakness in sales to utilities. This organic growth was achieved despite the supply chain constraints experienced by the Electrical Americas business segment during 2021, which had a negative impact on Net sales. The decrease in organic sales in 2020 was primarily driven by the impact of the COVID-19 pandemic, partially offset by growth in residential, data center, and utility end-markets.
The operating margin increased from 20.2% in 2020 to 20.6% in 2021 primarily due to higher organic sales volumes, the favorable net impact of an acquisition and a divestiture, and savings from restructuring actions. Conversely, commodity and logistics inflation had an unfavorable impact on the operating margin. The operating margin increased from 18.9% in 2019 to 20.2% in 2020 primarily due to the favorable impact from the divestiture of the Lighting business and cost containment actions to counteract the impact of the COVID-19 pandemic, partially offset by lower volumes.
Electrical Global
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net sales$5,516 17 %$4,703 (9)%$5,172 
Operating profit$1,034 38 %$750 (16)%$897 
Operating margin18.7 %15.9 %17.3 %
Changes in Net sales are summarized as follows:
2021
2020
Organic growth15 %(9)%
Foreign currency2 %— %
Total increase (decrease) in Net sales17 %(9)%
The increase in organic sales in 2021 was primarily due to broad-based strength in end-markets as they have largely recovered from the COVID-19 pandemic. The decrease in organic sales in 2020 was primarily driven by the impact of the COVID-19 pandemic, with particular weakness in global oil and gas markets and industrial applications.
The operating margin increased from 15.9% in 2020 to 18.7% in 2021 primarily due to higher sales volumes and savings from restructuring actions, partially offset by commodity and logistics inflation. The operating margin decreased from 17.3% in 2019 to 15.9% in 2020 primarily due to lower sales volumes and unfavorable product mix, partially offset by cost containment actions to mitigate the impact of the COVID-19 pandemic.
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Hydraulics
(In millions)20212020Change
from 2019		2019
Net sales$1,300 $1,842 (16)%$2,204 
Operating profit$177 $186 (4)%$193 
Operating margin13.6 %10.1 %8.8 %
Changes in Net sales are summarized as follows:
2020
Organic growth(15)%
Foreign currency(1)%
Total decrease in Net sales(16)%
On August 2, 2021, Eaton completed the sale of the Hydraulics business segment. As a result, net sales and operating profit for 2021 are not directly comparable to 2020, since 2021 only includes the results of the Hydraulics business through the date of the sale.
The decrease in organic sales in 2020 was primarily due to the impact from the COVID-19 pandemic, with weakness at both OEMs and distributors globally.
The operating margin increased from 8.8% in 2019 to 10.1% in 2020 primarily due to depreciation expense no longer being charged as a result of the business being classified as held for sale as discussed in Note 2 and cost containment actions to counteract the impact of the COVID-19 pandemic, partially offset by lower sales volumes.
Aerospace
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net sales$2,648 19 %$2,223 (10)%$2,480 
Operating profit$580 40 %$414 (30)%$595 
Operating margin21.9 %18.6 %24.0 %
Changes in Net sales are summarized as follows:
2021
2020
Organic growth(2)%(22)%
Acquisitions of Cobham Mission Systems and Souriau-Sunbank
20 %12 %
Foreign currency1 %— %
Total increase (decrease) in Net sales19 %(10)%
The decrease in organic sales in 2021 was primarily due to the impact of continued travel restrictions from the COVID-19 pandemic on commercial aviation and weakness in military aftermarket. The decrease in organic sales in 2020 was primarily due to the impact of the COVID-19 pandemic on commercial aviation, partially offset by growth in military sales.
The operating margin increased from 18.6% in 2020 to 21.9% in 2021 primarily due to the acquisition of Cobham Mission Systems and savings from restructuring actions, partially offset by lower organic sales volumes. The operating margin decrease from 24.0% in 2019 to 18.6% in 2020 primarily due to lower sales volumes and the acquisition of Souriau-Sunbank, partially offset by cost containment actions to mitigate the impact of the COVID-19 pandemic.
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Vehicle
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net sales$2,579 22 %$2,118 (30)%$3,038 
Operating profit$449 85 %$243 (47)%$460 
Operating margin17.4 %11.5 %15.1 %
Changes in Net sales are summarized as follows:
2021
2020
Organic growth21 %(24)%
Divestiture of Automotive Fluid Conveyance business— %(4)%
Foreign currency1 %(2)%
Total increase (decrease) in Net sales22 %(30)%
The increase in organic sales in 2021 was primarily due to strength in all regions compared to 2020 which was significantly impacted by plant shutdowns due to the COVID-19 pandemic. This organic growth was achieved despite the Vehicle business segment's organic sales being negatively impacted in 2021 as a result of its customers experiencing supply chain constraints leading to reduced production levels and historic low vehicle inventory. The decrease in organic sales in 2020 was driven by plant shutdowns in the second quarter of 2020, lower Class 8 OEM production, and weakness in light vehicle sales primarily due to the impact from the COVID-19 pandemic.
The operating margin increased from 11.5% in 2020 to 17.4% in 2021 primarily due to higher sales volumes and savings from restructuring actions, partially offset by commodity and logistics inflation. The operating margin decreased from 15.1% in 2019 to 11.5% in 2020 primarily due to lower sales volumes, partially offset by cost containment actions to mitigate the impact of the COVID-19 pandemic.
eMobility
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net sales$343 17 %$292 (9)%$321 
Operating profit (loss)$(29)(263)%$(8)(147)%$17 
Operating margin(8.5)%(2.7)%5.3 %
Changes in Net sales are summarized as follows:
2021
2020
Organic growth16 %(9)%
Foreign currency1 %— %
Total increase (decrease) in Net sales17 %(9)%
The increase in organic sales in 2021 was primarily due to strength in North American and Asia Pacific regions compared to 2020 which was significantly impacted by plant shutdowns due to the COVID-19 pandemic. This organic growth was achieved despite the eMobility business segment's organic sales being negatively impacted in 2021 as a result of its customers experiencing supply chain constraints leading to reduced production levels. The decrease in organic sales in 2020 was primarily due to the impact from the COVID-19 pandemic, with particular weakness in the legacy internal combustion engine platforms.
The operating margin decreased from negative 2.7% in 2020 to negative 8.5% in 2021 primarily due to increased research and development costs and manufacturing start-up costs associated with new electric vehicle programs, and commodity and logistics inflation, partially offset by higher sales volumes. The operating margin decreased from 5.3% in 2019 to negative 2.7% in 2020 primarily due to lower sales volumes and increased research and development costs.
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Corporate Expense
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Intangible asset amortization expense$444 25 %$354 (4)%$367 
Interest expense - net144 (3)%149 (25)%199 
Pension and other postretirement benefits (income) expense(65)(263)%40 233 %12 
Restructuring program charges78 (64)%214 NM— 
Other expense - net209 (52)%434 (20)%542 
Total corporate expense$810 (32)%$1,191 6 %$1,120 
Total corporate expense was $810 million in 2021 compared to Total corporate expense of $1,191 million in 2020. The decrease in Total corporate expense was primarily due to lower Other expense - net, lower Restructuring program charges, and the favorable impact of the freeze on the Company's United States pension plans, partially offset by higher Intangible asset amortization expense due to acquisitions of businesses. The decrease in Other expense - net is primarily due to the 2021 gain on sale of the Hydraulics business exceeding the 2020 gain on the sale of the Lighting business by $396 million. This decrease was partially offset by higher acquisition and divestiture charges and higher other corporate expenses due to the removal of the temporary cost containment actions taken during 2020 to mitigate the impact of the COVID-19 pandemic. Total corporate expense was $1,191 million in 2020 compared to Total Corporate expense of $1,120 million in 2019. The increase in Total corporate expense was primarily due to higher Restructuring program charges, partially offset by lower Other expense - net. The decrease in Other expense - net is primarily due to the 2020 gain on the sale of the Lighting business, partially offset by higher acquisition and divestiture charges.


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LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION
Liquidity and Financial Condition
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.
On March 8, 2021, a subsidiary of Eaton issued Euro denominated notes (2021 Euro Notes) with a face value of €1,500 million ($1,798 million), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2021 Euro Notes are comprised of two tranches of €900 million and €600 million, which mature in 2026 and 2030, respectively, with interest payable annually at a respective rate of 0.128% and 0.577%. The issuer received proceeds totaling €1,494 million ($1,790 million) from the issuance, net of financing costs and discounts.
On May 17, 2021, the Company entered into a $2,500 million 364-day revolving credit facility, which brought the Company’s total revolving credit facilities to $4,500 million. At June 30, 2021, the Company had access to the commercial paper markets through its $4,500 million commercial paper program, of which $3,372 million was outstanding including funds to finance the acquisition of Cobham Mission Systems discussed in Note 2. Eaton used the proceeds from the sale of the Hydraulics business, which was completed August 2, 2021, to reduce its outstanding commercial paper borrowings.
On September 22, 2021, the Company downsized the 364-day revolving credit facility from $2,500 million to $500 million, which reduced the Company's total revolving credit facilities to $2,500 million. In September 2021, the Company also downsized its commercial paper program to $2,500 million.
On October 4, 2021, the Company replaced its existing $500 million 364-day revolving credit facility, $750 million five-year revolving credit facility, $500 million four-year revolving credit facility, and $750 million five-year revolving credit facility, with a new $500 million 364-day revolving credit facility and a new $2,000 million five-year revolving credit facility that will expire on October 4, 2026. The revolving credit facilities totaling $2,500 million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton’s revolving credit facilities at December 31, 2021. The Company maintains access to the commercial paper markets through its $2,500 million commercial paper program, of which none was outstanding on December 31, 2021. In addition to the revolving credit facilities, the Company also had available lines of credit of $972 million from various banks primarily for the issuance of letters of credit, of which there was $335 million outstanding at December 31, 2021.
Eaton received proceeds of $1.4 billion from the sale of its Lighting business in 2020 and $3.1 billion from the sale of its Hydraulics business in 2021. The Company paid $4.45 billion to acquire Tripp Lite and Cobham Mission Systems in 2021.
Over the course of a year, cash, short-term investments, and short-term debt may fluctuate in order to manage global liquidity. As of December 31, 2021 and 2020, Eaton had cash of $297 million and $438 million, short-term investments of $271 million and $664 million, and short-term debt of $13 million and $1 million, respectively. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, availability under existing revolving credit facilities, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business, fund capital expenditures and acquisitions of businesses, as well as scheduled payments of long-term debt.
For additional information on financing transactions and debt, see Note 8.
Eaton’s credit facilities and indentures governing certain long-term debt contain various covenants, the violation of which would limit or preclude the use of the credit facilities for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. At Eaton’s present credit rating level, the most restrictive financial covenant provides that the ratio of secured debt (or lease payments due under a sale and leaseback transaction) to adjusted consolidated net worth (or consolidated net tangible assets, in each case as defined in the relevant credit agreement or indenture) may not exceed 10%. Eaton's actual ratios are substantially below the required threshold. In addition, Eaton is in compliance with each of its debt covenants for all periods presented.
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Cash Flows
A summary of cash flows is as follows:
(In millions)2021Change
from 2020		2020Change
from 2019		2019
Net cash provided by operating activities$2,163 $(781)$2,944 $(507)$3,451 
Net cash provided by (used in) investing activities(1,764)(2,161)397 2,263 (1,866)
Net cash used in financing activities(535)2,723 (3,258)(1,764)(1,494)
Effect of currency on cash(5)10 (15)(11)(4)
Total increase (decrease) in cash$(141)$68 $87 
Operating Cash Flow
Net cash provided by operating activities decreased by $781 million in 2021 compared to 2020. The decrease in net cash provided by operating activities in 2021 was primarily due to higher working capital balances to support the Company’s organic growth as our business segments have largely recovered from the negative impact of the COVID-19 pandemic, taxes paid on the sale of the Hydraulics business, and a $200 million pension contribution to Eaton's U.S. qualified pension plan in 2021.
Net cash provided by operating activities decreased by $507 million in 2020 compared to 2019. The decrease in net cash provided by operating activities in 2020 was driven by lower net income, partially offset by lower working capital balances compared to 2019.
Investing Cash Flow
Net cash used in investing activities increased by $2,161 million in 2021 compared to 2020. The increase in the use of cash was primarily driven by cash paid in 2021 for business acquisitions of $4,500 million compared to cash paid in 2020 for business acquisitions of $200 million, partially offset by proceeds received in 2021 from the sale of Hydraulics business of $3,129 million compared to proceeds received in 2020 from the sale of the Lighting business of $1,408 million, and net sales of short-term investments of $379 million in 2021 compared to net purchases of $441 million in 2020. Capital expenditures were $575 million in 2021 compared to $389 million in 2020.
Net cash provided by investing activities increased by $2,263 million in 2020 compared to 2019. The increase in the source of cash was primarily driven by proceeds from the sale of the Lighting business and lower cash paid for business acquisitions, partially offset by net purchases of short-term investments of $441 million in 2020 compared to net purchases of $70 million in 2019. Capital expenditures were $389 million in 2020 compared to $587 million in 2019.
Financing Cash Flow
Net cash used in financing activities decreased by $2,723 million in 2021 compared to 2020. The decrease in the use of cash was primarily due to higher proceeds from borrowings of $1,798 million in 2021 compared to no proceeds from borrowings in 2020, lower share repurchases of $122 million in 2021 compared to $1,608 million in 2020, and net proceeds of short-term debt of $20 million in 2021 compared to net payments of $254 million in 2020, partially offset by higher payments on borrowings of $1,013 million in 2021 compared to $249 million in 2020.
Net cash used in financing activities increased by $1,764 million in 2020 compared to 2019. The increase in the use of cash was primarily due to no proceeds from borrowings in 2020 compared to $1,232 million in 2019 and higher share repurchases of $1,608 million in 2020 compared to $1,029 million in 2019.
Uses of Cash
Purchases of Goods and Services
The Company purchases goods and services in the normal course of business based on expected usage. For certain purchases, the Company enters into purchase obligations with various vendors, which include short-term and long-term commitments for purchases of raw materials, outstanding non-cancelable purchase orders, releases under blanket purchase orders, and commitments under ongoing service arrangements. As of December 31, 2021, the Company has purchase obligations to support the operation of its business similar to those included in historical cash flow trends.
Capital Expenditures
Capital expenditures were $575 million, $389 million, and $587 million in 2021, 2020 and 2019, respectively. Eaton expects approximately $650 million in capital expenditures in 2022.
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Dividends
Cash dividend payments were $1,219 million, $1,175 million, and $1,201 million for 2021, 2020 and 2019, respectively. On February 23, 2022, Eaton's Board of Directors declared a quarterly dividend of $0.81 per ordinary share, a 7% increase over the dividend paid in the fourth quarter of 2021. The dividend is payable on March 31, 2022 to shareholders of record on March 11, 2022. Payment of quarterly dividends in the future depends upon the Company’s ability to generate net income and operating cash flows, among other factors, and is subject to declaration by the Eaton Board of Directors. The Company intends to continue to pay quarterly dividends in 2022.
Share Repurchases
On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $5.0 billion of ordinary shares (2019 Program). Under the 2019 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During 2021 and 2020, 0.9 million and 17.1 million ordinary shares, respectively, were repurchased under the 2019 Program in the open market at a total cost of $122 million and $1,608 million, respectively. The Company will continue to pursue share repurchases in 2022 depending on market conditions and capital levels. On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $5.0 billion in repurchases to be made during the three-year period commencing on that date (2022 Program).
Acquisition of Businesses
The Company paid cash of $4,500 million, $200 million, and $1,180 million to acquire businesses in 2021, 2020 and 2019, respectively. The Company will continue to focus on deploying its capital toward businesses that provide opportunities for higher growth and strong returns, and align with secular trends and its power management strategies.
Debt
The Company manages a number of short-term and long-term debt instruments, including commercial paper. For additional information on financing transactions and debt, see Note 8.
Leases
See Note 7 for maturities of lease liabilities.
Unrecognized Income Tax Benefits
At December 31, 2021, the gross unrecognized income tax benefits totaled $1,120 million and interest and penalties were $128 million. Eaton cannot predict with reasonable certainty the timing of cash settlements with the respective taxing authorities. For additional information about income taxes see Note 11.
Defined Benefits Plans
Pension Plans
During 2021, the fair value of plan assets in the Company’s employee pension plans increased $319 million to $5,919 million at December 31, 2021. The increase in plan assets was primarily due to strong returns on plan assets and the Company's contributions to the pension plans. At December 31, 2021, the net unfunded position of $678 million in pension liabilities consisted of $819 million in plans that have no funding requirements and $97 million in plans that require funding, partially offset by $59 million in the U.S. qualified pension plan that is overfunded and $179 million in all other plans that are overfunded.
Funding requirements are a major consideration in making contributions to Eaton’s pension plans. With respect to the Company’s pension plans worldwide, the Company intends to contribute annually not less than the minimum required by applicable law and regulations. In 2021, $343 million was contributed to the pension plans. The Company anticipates making $114 million of contributions to certain pension plans during 2022. The funded status of the Company’s pension plans at the end of 2022, and future contributions, will depend primarily on the actual return on assets during the year and the discount rate used to calculate certain benefits at the end of the year. For additional information about pension plans see Note 9.
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Supply Chain Finance Program
The Company negotiates payment terms directly with its suppliers for the purchase of goods and services. In addition, a third-party financial institution offers a voluntary supply chain finance (SCF) program that enables certain of the Company’s suppliers, at the supplier’s sole discretion, to sell receivables due from the Company to the financial institution on terms directly negotiated with the financial institution. If a supplier elects to participate in the SCF program, the supplier decides which invoices are sold to the financial institution and the Company has no economic interest in a supplier’s decision to sell an invoice. The SCF program does not have a significant impact on the Company’s liquidity as payments by the Company to participating suppliers are paid to the financial institution on the invoice due date, regardless of whether an individual invoice is sold by the supplier to the financial institution. The amounts due to the financial institution for suppliers that participate in the SCF program are included in Accounts payable on the Company’s Consolidated Balance Sheets, and the associated payments are included in operating activities on the Consolidated Statements of Cash Flows. At  December 31, 2021 and 2020, Accounts payable included $151 million and $15 million, respectively, payable to suppliers that have elected to participate in the SCF program.
Guaranteed Debt
Issuers, Guarantors and Guarantor Structure    
Eaton Corporation has issued senior notes pursuant to indentures dated April 1, 1994 (the 1994 Indenture), November 20, 2012 (the 2012 Indenture) and September 15, 2017 (the 2017 Indenture). The senior notes of Eaton Corporation are registered under the Securities Act of 1933, as amended (the Registered Senior Notes). Eaton Corporation is also the issuer of one outstanding series of privately placed debt securities (the PPNs), and Eaton Capital Unlimited Company, another subsidiary of Eaton, is the issuer of four outstanding series of debt securities sold in offshore transactions under Regulation S promulgated under the Securities Act (the Eurobonds). The PPNs, the Eurobonds and the Registered Senior Notes (together, the Senior Notes) comprise substantially all of Eaton’s long-term indebtedness.
Substantially all of the Senior Notes, together with the credit facilities described above under Financial Condition and Liquidity (the Credit Facilities), are guaranteed by Eaton and 18 of its subsidiaries. Accordingly, they rank equally with each other. However, because these obligations are not secured, they would be effectively subordinated to any existing or future secured indebtedness of Eaton and its subsidiaries. As of December 31, 2021, Eaton has no material, long-term secured debt. The guaranteed Registered Senior Notes are also structurally subordinated to the liabilities of Eaton's subsidiaries that are not guarantors. Except as described below under Future Guarantors, Eaton is not obligated to cause its subsidiaries to guarantee the Registered Senior Notes.
The table set forth in Exhibit 22 filed with the 2020 Form 10-K filed on February 24, 2021, details the primary obligors and guarantors with respect to the guaranteed Registered Senior Notes.
Terms of Guarantees of Registered Securities
Payment of principal and interest on the Registered Senior Notes is guaranteed, on an unsecured, unsubordinated basis by the subsidiaries of Eaton set forth in the table referenced in Exhibit 22. Each guarantee is full and unconditional, and joint and several. Each guarantor's guarantee is an unsecured obligation that ranks equally with all its other unsecured and unsubordinated indebtedness. The obligations of each guarantor under its guarantee of the Registered Senior Notes is subject to a customary savings clause or similar provision designed to prevent such guarantee from constituting a fraudulent conveyance or otherwise legally impermissible or voidable obligation.
Generally, each guarantee of the Registered Senior Notes by a guarantor other than Eaton provides that it will be automatically and unconditionally released and discharged upon:
(a)the consummation of any transaction permitted under the applicable indenture resulting in such guarantor ceasing to be a subsidiary, such as a sale to a third party;
(b)such guarantee (so long as the guarantor is not obligated under any other U.S. debt obligations), becoming prohibited by any applicable law, rule or regulation or by any contractual obligation;
(c)such guarantee resulting in material adverse tax consequences to Eaton or any of its subsidiaries (so long as the applicable guarantor is not obligated under any other U.S. debt obligation); or
(d)such guarantor becoming a controlled foreign corporation within the meaning Section 957(a) of the Internal Revenue Code (a CFC), or an entity the material assets of which is limited to equity interests of a CFC.
Notwithstanding the foregoing, each guarantee by a direct or indirect parent of Eaton Corporation (other than Eaton) provides that it will be released only under the circumstances described in subparagraphs (b) and (c) above.

The guarantee of Eaton does not contain any release provisions.

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Future Guarantors
The 2012 and 2017 Indentures generally provide that, with certain limited exceptions, any subsidiary of Eaton must become a guarantor if it becomes obligated as borrower or guarantor under any series of debt securities or a syndicated credit facility. Further, any entity that becomes a direct or indirect parent entity of Eaton Corporation and holds any material assets, with certain limited exceptions, or owes any material liabilities must become a guarantor.
The 1994 Indenture does not contain provisions with respect to future guarantors.
Summarized Financial Information of Guarantors and Issuers
(In millions)December 31,
2021
Current assets$3,032 
Noncurrent assets11,553 
Current liabilities3,950 
Noncurrent liabilities8,461 
Amounts due to subsidiaries that are non-issuers and non-guarantors - net18,006 
(In millions)2021
Net sales$10,261 
Sales to subsidiaries that are non-issuers and non-guarantors873 
Cost of products sold8,413 
Expense from subsidiaries that are non-issuers and non-guarantors - net435 
Net income504 
The financial information presented is that of Eaton Corporation and the Guarantors, which includes Eaton Corporation plc, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between Eaton Corporation and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.
Credit Ratings
Eaton's debt has been assigned the following credit ratings:
Credit Rating Agency (long- /short-term rating)RatingOutlook
Standard & Poor'sA-/A-2Stable outlook
Moody'sBaa1/P-2Stable outlook
FitchBBB+/F2Negative outlook


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CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States requires management to make certain estimates and assumptions that may involve the exercise of significant judgment. For any estimate or assumption used, there may be other reasonable estimates or assumptions that could have been used. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other such estimates and assumptions would have caused materially different amounts to have been reported. Actual results may differ from these estimates.
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the extent it is not probable that a significant reversal of cumulative sales will occur. Additionally, contracts can be modified to account for changes in contract specifications, requirements or sale price. The effect of a contract modification on the sales price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a cumulative catch-up basis.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the Consolidated Balance Sheet. See Note 3 for additional information.
Impairment of Goodwill and Other Long-Lived Assets
Goodwill
Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Goodwill is tested for impairment at the reporting unit level, and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company’s reporting units are equivalent to the reportable operating segments, except for the Aerospace segment which has two reporting units. Goodwill is assigned to each reporting unit, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis.
Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price.
The annual goodwill impairment test was performed using a qualitative analysis in 2021 and 2020, except for the eMobility reporting unit which used a quantitative analysis. A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each reporting unit. The results of the qualitative analyses did not indicate a need to perform quantitative analysis.
Goodwill impairment testing was also performed using quantitative analyses in 2020 for the Electrical Americas, Electrical Global, Hydraulics and Aerospace reporting units due to a reorganization of the Company’s businesses and in 2020 as a result of the Hydraulics business being classified as held for sale as discussed in Note 2. The Company used the relative fair value method to reallocate goodwill.
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Quantitative analyses were performed by estimating the fair value for each reporting unit using a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The future cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the reporting unit's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
Based on these analyses performed in 2021 and 2020, the fair value of Eaton's reporting units continue to substantially exceed their respective carrying amounts and thus, no impairment exists.
Indefinite Life Intangible Assets
Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts. Indefinite life intangible asset impairment testing for 2021 and 2020 was performed using a quantitative analysis. Determining the fair value of these assets requires significant judgment and the Company uses a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. Events or circumstances that may result in an impairment review include changes in industry and market considerations, cost factors, financial performance, and other relevant entity-specific events that could affect inputs used to determine the respective fair values of the indefinite-lived intangible assets.
For 2021 and 2020, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
For additional information about goodwill and other intangible assets see Note 6.
Acquisitions of Businesses
The acquisition of a business is accounted for using the acquisition method of accounting which requires assets and liabilities to be recognized at their fair values on the acquisition date. The initial fair value of assets acquired and liabilities assumed may be revised based on the final determination of fair value during the measurement period of 12 months from the acquisition date. The Company generally determines the fair value of intangible assets acquired using third-party valuations that are prepared using discounted cash flow models that rely on the Company's estimates. These estimates require judgement of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values. For additional information about the acquisitions of businesses see Note 2.
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Divestitures of Businesses
The Company records assets and liabilities of a business to be sold as held for sale in the Consolidated Balance Sheet when all the required criteria are met. The held for sale assets and liabilities are initially measured at the lesser of their carrying value or fair value less cost to sell, with any resulting loss being immediately recognized. In each subsequent reporting period until the business is sold, the Company continues to estimate the fair value less cost to sell of the business and recognizes any additional losses, or any gains to the extent losses were previously recorded on the held for sale assets and liabilities.
In the first quarter of 2020, the Company used the relative fair value method to allocate goodwill to the Hydraulics business. The fair value of the Hydraulics business was estimated based on a combination of the price paid to Eaton by Danfoss A/S and a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions. For additional information about the divestitures of businesses see Note 2.
Recoverability of Deferred Income Tax Assets
Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine the income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards.
Management evaluates the realizability of deferred income tax assets for each jurisdiction in which it operates. If the Company experiences cumulative pre-tax income in a particular jurisdiction in a three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pre-tax losses in a particular jurisdiction in a three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in a particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as those used for the Company’s goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance. For additional information about income taxes see Note 11.
Unrecognized Income Tax Benefits
Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company evaluates and adjusts the amount of unrecognized income tax benefits based on changes in law, facts and circumstances. Eaton also estimates, where reasonably possible, the increase or decrease in the amount of unrecognized income tax benefits in the next 12 months.
The evaluation and determination of the amount of unrecognized income tax benefits related to uncertain tax positions is complex and involves both the exercise of judgement and the utilization of certain estimates and assumptions. Each tax position carries unique facts and circumstances that must be evaluated in light of current tax laws, regulations, and judicial decisions. Additionally, the ultimate resolution of the majority of Eaton’s unrecognized income tax benefits is dependent upon uncontrollable factors such as the timing of finalizing resolutions of audit disputes through reaching settlement agreements or concluding litigation, or changes in law.
Pension and Other Postretirement Benefits Plans
The measurement of liabilities related to pension plans and other postretirement benefits plans is based on assumptions related to future events including interest rates, return on plan assets, rate of compensation increases, and health care cost trend rates. Actual plan asset performance will either reduce or increase losses included in accumulated other comprehensive loss, which ultimately affects net income.
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The discount rate for United States plans was determined by discounting the expected future benefit payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date and solving for the single rate that would generate the same benefit obligation. Only corporate bonds with a rating of Aa, determined by averaging the ratings by Moody’s, Standard & Poor's, and Fitch, were included. Callable bonds that are not make-whole bonds and certain other non-comparable bonds were eliminated. Finally, a subset of bonds was selected by grouping the universe of bonds by duration and retaining 50% of the bonds that had the highest yields.
The discount rates for non-United States plans were determined by region and are based on high quality long-term corporate and government bonds. Consideration has been given to the duration of the liabilities in each plan when selecting the bonds to be used in determining the discount rate.
To estimate the service and interest cost components of net periodic benefit cost for the vast majority of its defined benefits pension and other postretirement benefits plans, the Company used a spot rate approach by applying the specific spot rates along the yield curve used to measure the benefit obligation at the beginning of the period to the relevant projected cash flows.
Key assumptions used to calculate pension and other postretirement benefits expense are adjusted at each year-end. A 1-percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $54 million effect on pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $48 million effect on pension expense. A 1-percentage point change in the assumed rate of return on other postretirement benefits assets is estimated to have less than $1 million effect on other postretirement benefits expense. A 1-percentage point change in the discount rate is estimated to have less than $1 million effect on expense for other postretirement benefits plans.
Additional information related to changes in key assumptions used to recognize expense for other postretirement benefits plans is found in Note 9.

MARKET RISK DISCLOSURE
On a regular basis, Eaton monitors third-party depository institutions that hold its cash and short-term investments, primarily for safety of principal and secondarily for maximizing yield on those funds. The Company diversifies its cash and short-term investments among counterparties to minimize exposure to any one of these entities. Eaton also monitors the creditworthiness of its customers and suppliers to mitigate any adverse impact.
Eaton uses derivative instruments to manage exposure to volatility in raw material costs, currency, and interest rates on certain debt instruments. Derivative financial instruments used by the Company are straightforward and non-leveraged. 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. See Note 15 for additional information about hedges and derivative financial instruments.
Eaton’s ability to access the commercial paper market, and the related cost of these borrowings, is based on the strength of its credit rating and overall market conditions. During 2021, the Company has not experienced any material limitations in its ability to access these sources of liquidity. At December 31, 2021, Eaton had $2,500 million of long-term revolving credit facilities with banks in support of its commercial paper program. It has no borrowings outstanding under these revolving credit facilities.
Interest rate risk can be measured by calculating the short-term earnings impact that would result from adverse changes in interest rates. This exposure results from short-term debt, which includes commercial paper at a floating interest rate, long-term debt that has been swapped to floating rates, and money market investments that have not been swapped to fixed rates. Based upon the balances of investments and floating rate debt at year end 2021, a 100 basis point increase in short-term interest rates would have increased the Company’s net, pre-tax interest expense by $15 million.
Eaton also measures interest rate risk by estimating the net amount by which the fair value of the Company’s financial liabilities would change as a result of movements in interest rates. Based on Eaton’s best estimate for a hypothetical, 100 basis point increase in interest rates at December 31, 2021, the market value of the Company’s debt and interest rate swap portfolio, in aggregate, would decrease by $503 million.
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In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates the London Interbank Offered Rate (LIBOR), announced it intends to phase out LIBOR. The final publication of rates for certain USD LIBOR tenors is expected to be on June 30, 2023. Various parties, including government agencies, are seeking to identify alternative rates to replace LIBOR. The Company has established a cross-functional project team to evaluate the potential impacts of alternative rates as replacements to LIBOR in the Company’s contracts, which primarily include revolving credit facilities, fixed-to-floating interest rate swaps, and forward starting floating-to-fixed interest rate swaps. As of December 31, 2021, the Company’s $500 million 364-day revolving credit facility that will expire on October 3, 2022 and $2,000 million five-year revolving credit facility that will expire on October 4, 2026 both include a transition process from LIBOR to an alternative rate. The Company’s interest rate swaps are expected to settle prior to June 30, 2023. The Company continues to evaluate the potential impacts of the transition from LIBOR to alternative rates in its contracts and the transition is not expected to have a material impact on the consolidated financial statements.
The Company is exposed to fluctuations in commodity prices due to volatility in raw material costs and contractual agreements with suppliers. To partially mitigate this exposure, Eaton enters into commodity contracts for certain raw material purchases with the objective of minimizing changes in inventory cost due to market price fluctuations. These commodity contracts are designated for hedge accounting and are generally less than one year in duration. Based on Eaton’s best estimate for a hypothetical 10% fluctuation in commodity prices the gain or loss would be $4 million. The sensitivity analysis of the effects of changes in commodity prices assumes the notional value to remain constant for the next 12 months. Any change in the value of the contracts would be offset by an inverse change in the value of the underlying hedged transactions.
The Company is exposed to currency risk associated with translating its functional currency financial statements into its reporting currency, which is the U.S. dollar. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. Eaton also monitors exposure to transactions denominated in currencies other than the functional currency of each country in which the Company operates, and regularly enters into forward contracts to mitigate that exposure. In the aggregate, Eaton’s portfolio of forward contracts related to such transactions was not material to its Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS
This Annual Report to Shareholders contains forward-looking statements concerning litigation and regulatory developments, expected pension or other post-retirement benefits payments, contributions and rates of return, expected backlog recognition, expected restructuring charges and benefits, expected future liquidity, and our intended response to climate risks and opportunities. 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: the course of the COVID-19 pandemic and government responses thereto; 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; supply chain disruptions, competitive pressures on sales and pricing; unanticipated changes in the cost of material, labor 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, natural disasters, civil or political unrest or terrorism; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements.
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