Eaton Corp plc 10-Q for FY2022 Q1
Eaton Corp plc (ETN)
10-Q
2022-05-03
For: 2022-03-31
View Original
Added on
April 08, 2026
About this 10-Q
Eaton Corp plc filed this 10-Q on May 3, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.84B
- up 3.2% from $4.69B a year earlier
- Net income
- $532M
- up 16.2% from net income of $458M a year earlier
- Diluted EPS
- $1.33
- up 16.7% from $1.14 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2022
Commission file number 000-54863
(Exact name of registrant as specified in its charter) | ||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) | ||||||||||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||||||||
| (Registrant's telephone number, including area code) | |||||||||||||||||||||||||||||||||||
| Not applicable | |||||||||||||||||||||||||||||||||||
| (Former name, former address and former fiscal year if changed since last report) | |||||||||||||||||||||||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | |||||||||||||||||||||||||||||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | |||||||||||||||||||||||||||||||||
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 and post 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):
| ☑ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||||||||
| Smaller reporting company | Emerging growth company | (Do not check if a smaller reporting company) | |||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
There were 399.0 million Ordinary Shares outstanding as of March 31, 2022.
| TABLE OF CONTENTS | |||||
PART I — FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS.
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Net sales | $ | $ | |||||||||||||||||||||
| Cost of products sold | |||||||||||||||||||||||
| Selling and administrative expense | |||||||||||||||||||||||
| Research and development expense | |||||||||||||||||||||||
| Interest expense - net | |||||||||||||||||||||||
| Gain on sale of business | |||||||||||||||||||||||
| Other income - net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less net income for noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | $ | |||||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Weighted-average number of ordinary shares outstanding | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Cash dividends declared per ordinary share | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Less net income for noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Currency translation and related hedging instruments | ( | ( | |||||||||||||||||||||
| Pensions and other postretirement benefits | |||||||||||||||||||||||
| Cash flow hedges | |||||||||||||||||||||||
| Other comprehensive income (loss) attributable to Eaton ordinary shareholders | ( | ||||||||||||||||||||||
| Total comprehensive income attributable to Eaton ordinary shareholders | $ | $ | |||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash | $ | $ | |||||||||
| Short-term investments | |||||||||||
| Accounts receivable - net | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment | |||||||||||
| Land and buildings | |||||||||||
| Machinery and equipment | |||||||||||
| Gross property, plant and equipment | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Net property, plant and equipment | |||||||||||
| Other noncurrent assets | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets | |||||||||||
| Operating lease assets | |||||||||||
| Deferred income taxes | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Short-term debt | $ | $ | |||||||||
| Current portion of long-term debt | |||||||||||
| Accounts payable | |||||||||||
| Accrued compensation | |||||||||||
| Other current liabilities | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent liabilities | |||||||||||
| Long-term debt | |||||||||||
| Pension liabilities | |||||||||||
| Other postretirement benefits liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total noncurrent liabilities | |||||||||||
| Shareholders’ equity | |||||||||||
Ordinary shares ( | |||||||||||
| Capital in excess of par value | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Shares held in trust | ( | ( | |||||||||
| Total Eaton shareholders’ equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three months ended March 31 | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( | ||||||||||
| Pension and other postretirement benefits expense | |||||||||||
| Contributions to pension plans | ( | ( | |||||||||
| Contributions to other postretirement benefits plans | ( | ( | |||||||||
| Gain on sale of business | ( | ||||||||||
| Changes in working capital | ( | ( | |||||||||
| Other - net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| Investing activities | |||||||||||
| Capital expenditures for property, plant and equipment | ( | ( | |||||||||
| Cash paid for acquisitions of businesses, net of cash acquired | ( | ( | |||||||||
| Investments in associate companies | ( | ( | |||||||||
| Purchases of short-term investments - net | ( | ( | |||||||||
| Payments for settlement of currency exchange contracts not designated as hedges - net | ( | ||||||||||
| Other - net | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Financing activities | |||||||||||
| Proceeds from borrowings | |||||||||||
| Payments on borrowings | ( | ( | |||||||||
| Short-term debt, net | |||||||||||
| Cash dividends paid | ( | ( | |||||||||
| Exercise of employee stock options | |||||||||||
| Repurchase of shares | ( | ( | |||||||||
| Employee taxes paid from shares withheld | ( | ( | |||||||||
| Other - net | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of currency on cash | ( | ||||||||||
| Less: Increase in cash classified as held for sale | ( | ||||||||||
| Decrease in cash | ( | ( | |||||||||
| Cash at the beginning of the period | |||||||||||
| Cash at the end of the period | $ | $ | |||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1.BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.
This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2021 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Note 2.ACQUISITIONS AND DIVESTITURE OF BUSINESSES
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. During the measurement period which ended in March 2022, opening balance sheet adjustments were made to finalize Eaton's fair value estimates based on the final valuations received, which are summarized in the table below. The measurement period adjustments did not have a material impact to the Consolidated Statements of Income.
| (In millions) | Preliminary Allocation | Measurement Period Adjustments | Final Allocation | |||||||||||||||||||||||
| Short-term investments | $ | $ | — | $ | ||||||||||||||||||||||
| Accounts receivable | ( | |||||||||||||||||||||||||
| Inventory | ( | |||||||||||||||||||||||||
| Prepaid expenses and other current assets | ( | |||||||||||||||||||||||||
| Property, plant and equipment | ( | |||||||||||||||||||||||||
| Other intangible assets | ( | |||||||||||||||||||||||||
| Other assets | ||||||||||||||||||||||||||
| Accounts payable | ( | — | ( | |||||||||||||||||||||||
| Other current liabilities | ( | ( | ( | |||||||||||||||||||||||
| Other noncurrent liabilities | ( | ( | ( | |||||||||||||||||||||||
| Total identifiable net assets | ( | |||||||||||||||||||||||||
| Goodwill | ||||||||||||||||||||||||||
| Total consideration, net of cash received | $ | $ | $ | |||||||||||||||||||||||
6
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 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.
Eaton's 2021 Condensed Consolidated Financial Statements include Tripp Lite’s results of operations, including sales of $26 million, from the date of acquisition through March 31, 2021.
Acquisition of Mission Systems
On June 1, 2021, Eaton acquired Mission Systems for $2.80 billion, net of cash received. Mission Systems is a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. Mission Systems is reported within the Aerospace business segment.
The acquisition of Mission Systems 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. There has not been a material change from the estimated fair values of the assets acquired and liabilities assumed presented in Note 2 to the Consolidated Financial Statements in the 2021 Form 10-K. Draft third-party valuations for Other intangible assets and Property, plant and equipment have been received. These preliminary estimates will be finalized in the second quarter of 2022 when our review of the third-party valuations are completed, further information becomes available and additional analyses are performed, and these differences could have a material impact on Eaton's preliminary purchase price allocation.
Sale of Hydraulics business
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 in 2021. According to the terms of the sales agreement, the Company finalized negotiations of post-closing adjustments with Danfoss A/S during the first quarter of 2022. As a result of these negotiations, the Company recognized an additional pre-tax gain of $24 million. The business had sales of $1.3 billion in 2021 through the date of the sale.
7
Acquisition of Royal Power Solutions
On January 5, 2022, Eaton acquired Royal Power Solutions for $612 million, net of cash received. 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 is reported within the eMobility business segment.
The acquisition of Royal Power Solutions 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. 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.
| (In millions) | January 5, 2022 | |||||||||||||||||||
| Accounts receivable | $ | |||||||||||||||||||
| Inventory | ||||||||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||||||||
| Property, plant and equipment | ||||||||||||||||||||
| Other intangible assets | ||||||||||||||||||||
| Other assets | ||||||||||||||||||||
| Accounts payable | ( | |||||||||||||||||||
| Other current liabilities | ( | |||||||||||||||||||
| Other noncurrent liabilities | ( | |||||||||||||||||||
| Total identifiable net assets | ||||||||||||||||||||
| Goodwill | ||||||||||||||||||||
| Total consideration, net of cash received | $ | |||||||||||||||||||
Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Royal Power Solutions. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. Other intangible assets of $306 million are expected to include customer relationships, trademarks and technology. 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.
Eaton's 2022 Condensed Consolidated Financial Statements include Royal Power Solutions' results of operations, including segment operating profit of $5 million on sales of $38 million, from the date of acquisition through March 31, 2022.
8
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 following table provides disaggregated sales by lines of businesses, geographic destination, market channel or end market, as applicable, for the Company's operating segments:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Electrical Americas | |||||||||||||||||||||||
| Products | $ | $ | |||||||||||||||||||||
| Systems | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Electrical Global | |||||||||||||||||||||||
| Products | $ | $ | |||||||||||||||||||||
| Systems | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Hydraulics | |||||||||||||||||||||||
| United States | $ | $ | |||||||||||||||||||||
| Rest of World | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Original Equipment Manufacturers | $ | $ | |||||||||||||||||||||
| Aftermarket | |||||||||||||||||||||||
| Industrial and Other | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| Vehicle | |||||||||||||||||||||||
| Commercial | $ | $ | |||||||||||||||||||||
| Passenger and Light Duty | |||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||
| eMobility | $ | $ | |||||||||||||||||||||
| Total net sales | $ | $ | |||||||||||||||||||||
9
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 receivable from customers were $3,216 million and $2,896 million at March 31, 2022 and December 31, 2021, 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 $194 million and $187 million at March 31, 2022 and December 31, 2021, 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 2022.
Changes in the deferred revenue liabilities are as follows:
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2022 | $ | ||||
| Customer deposits and billings | |||||
| Revenue recognized in the period | ( | ||||
| Translation | ( | ||||
| Balance at March 31, 2022 | $ | ||||
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2021 | $ | ||||
| Customer deposits and billings | |||||
| Revenue recognized in the period | ( | ||||
| Translation and other | ( | ||||
| Balance at March 31, 2021 | $ | ||||
Deferred revenue liabilities of $401 million and $395 million as of March 31, 2022 and December 31, 2021, respectively, were included in Other current liabilities with the remaining balance presented in Other noncurrent liabilities.
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
10
Note 5. INVENTORY
Inventory is carried at lower of cost or net realizable value. The components of inventory are as follows:
| (In millions) | March 31, 2022 | December 31, 2021 | |||||||||
| Raw materials | $ | $ | |||||||||
| Work-in-process | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
Note 6. GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
| (In millions) | January 1, 2022 | Additions | Translation | March 31, 2022 | ||||||||||||||||||||||||||||||||||||||||
| Electrical Americas | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
| Electrical Global | ( | |||||||||||||||||||||||||||||||||||||||||||
| Aerospace | ( | |||||||||||||||||||||||||||||||||||||||||||
| Vehicle | ||||||||||||||||||||||||||||||||||||||||||||
| eMobility | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
The 2022 additions to goodwill relate primarily to the anticipated synergies of acquiring Royal Power Solutions. The allocation of the purchase price from this acquisition is preliminary and will be completed during the measurement period.
Note 7. RETIREMENT BENEFITS PLANS
The components of retirement benefits expense (income) are as follows:
| United States pension benefit expense (income) | Non-United States pension benefit expense (income) | Other postretirement benefits expense (income) | |||||||||||||||||||||||||||||||||
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Service cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||||||||||||||
| Expected return on plan assets | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Amortization | ( | ( | |||||||||||||||||||||||||||||||||
| ( | ( | ||||||||||||||||||||||||||||||||||
| Settlements | |||||||||||||||||||||||||||||||||||
| Total expense (income) | $ | ( | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||
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.
During the first quarter of 2022, the Company recognized settlement losses from lump-sum distributions of $14 million, and remeasured certain pension plans as a result of lump-sum distributions exceeding or expected to exceed the sum of service and interest costs for the year. These remeasurements resulted in increases of $32 million in pension assets, decreases of $15 million in pension liabilities, and decreases of $47 million in other comprehensive loss.
The components of retirement benefits expense (income) other than service costs are included in Other income - net.
11
Note 8. LEGAL CONTINGENCIES
Note 9. INCOME TAXES
The effective income tax rate for the first quarter of 2022 was expense of 13.9 % compared to expense of 14.7 % for the first quarter of 2021. The decrease in the effective tax rate in the first quarter of 2022 was primarily due to the excess tax benefits recognized for employee share-based payments in the first quarter of 2022.
Brazil Tax Years 2005-2012
The Company has two Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $29 million plus $107 million of interest and penalties (translated at the March 31, 2022 exchange rate). The Company is challenging this assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April 27, 2022, the Company filed a motion for clarification relating to that decision, which is currently pending with the court. The Company intends to continue its challenge of this assessment in the judicial system, including appealing the April 18, 2022 decision, if necessary.
As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $35 million plus $115 million of interest and penalties (translated at the March 31, 2022 exchange rate), which the Company is challenging in the judicial system. This case is still pending resolution at the first judicial level.
Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of certain assets as security for the alleged deficiencies. As of March 31, 2022, the Company pledged Brazilian real estate assets with net book value of $22 million and provided additional security in the form of bank secured bonds totaling $113 million and a cash deposit of $20 million (translated at the March 31, 2022 exchange rate).
The Company believes that the final resolution of both of the assessments will not have a material impact on its condensed 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 these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s condensed consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct.
12
Note 10. EQUITY
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). 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). Under the 2022 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During the three months ended March 31, 2022, 0.6 million ordinary shares were repurchased under the 2022 program in the open market at a total cost of $86 million. During the three months ended March 31, 2021, 0.5 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $59 million.
The changes in Shareholders’ equity are as follows:
| Ordinary shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Shares held in trust | Total Eaton shareholders' equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid and accrued | — | — | — | ( | — | — | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | — | ( | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Ordinary shares | Capital in excess of par value | Retained earnings | Accumulated other comprehensive loss | Shares held in trust | Total Eaton shareholders' equity | Noncontrolling interests | Total equity | ||||||||||||||||||||||||||||||||||||||||||||||
| (In millions) | Shares | Dollars | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid and accrued | — | — | — | ( | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | ( | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | $ | ( | $ | ( | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||
The changes in Accumulated other comprehensive loss are as follows:
| (In millions) | Currency translation and related hedging instruments | Pensions and other postretirement benefits | Cash flow hedges | Total | |||||||||||||||||||
| Balance at January 1, 2022 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss (income) | ( | ||||||||||||||||||||||
| Net current-period Other comprehensive income (loss) | ( | ||||||||||||||||||||||
| Balance at March 31, 2022 | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
13
The reclassifications out of Accumulated other comprehensive loss are as follows:
| (In millions) | Three months ended March 31, 2022 | Consolidated statements of income classification | |||||||||
| Amortization of defined benefit pensions and other postretirement benefits items | |||||||||||
| Actuarial loss and prior service cost | $ | ( | 1 | ||||||||
| Tax benefit | |||||||||||
| Total, net of tax | ( | ||||||||||
| Gains and (losses) on cash flow hedges | |||||||||||
| Commodity contracts | Cost of products sold | ||||||||||
| Tax expense | |||||||||||
| Total, net of tax | |||||||||||
| Total reclassifications for the period | $ | ( | |||||||||
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 7 for additional information about pension and other postretirement benefits items.
Net Income Per Share Attributable to Eaton Ordinary Shareholders
A summary of the calculation of net income per share attributable to Eaton ordinary shareholders is as follows:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | $ | |||||||||||||||||||||
| Weighted-average number of ordinary shares outstanding - diluted | |||||||||||||||||||||||
| Less dilutive effect of equity-based compensation | |||||||||||||||||||||||
| Weighted-average number of ordinary shares outstanding - basic | |||||||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
| Basic | |||||||||||||||||||||||
14
Note 11. FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments and contingent consideration recognized at fair value, and the fair value measurements used, is as follows:
| (In millions) | Total | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Net derivative contracts | |||||||||||||||||||||||
| Contingent consideration from acquisition of Green Motion | ( | ( | |||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||
| Cash | $ | $ | $ | $ | |||||||||||||||||||
| Short-term investments | |||||||||||||||||||||||
| Net derivative contracts | |||||||||||||||||||||||
| Contingent consideration from acquisition of Green Motion | ( | ( | |||||||||||||||||||||
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.
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.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $8,491 million and fair value of $8,709 million at March 31, 2022 compared to $8,566 million and $9,232 million, respectively, at December 31, 2021. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
15
Note 12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
•Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
•Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
•Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Condensed Consolidated Statements of Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $2,819 million at March 31, 2022 and $2,880 million at December 31, 2021.
16
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 | ||||||||||||||||||||||||||||||||||
| March 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | $ | $ | $ | $ | $ | Cash flow | |||||||||||||||||||||||||||||||||||
| Currency exchange contracts | Cash flow | ||||||||||||||||||||||||||||||||||||||||
| Commodity contracts | Cash flow | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Fixed-to-floating interest rate swaps | $ | $ | $ | $ | $ | Fair value | |||||||||||||||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | Cash flow | ||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | Cash flow | ||||||||||||||||||||||||||||||||||||||||
| Commodity contracts | Cash flow | ||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||||||||||||||
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 Condensed Consolidated Statement of Cash Flows.
As of March 31, 2022, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
| Commodity | March 31, 2022 | Term | ||||||||||||||||||||||||
| Copper | Millions of pounds | |||||||||||||||||||||||||
| Gold | Troy ounces | |||||||||||||||||||||||||
| Silver | Troy ounces | |||||||||||||||||||||||||
17
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 Sheets | March 31, 2022 | December 31, 2021 | March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Long-term debt | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
(a) At March 31, 2022 and December 31, 2021, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $70 million and $33 million, respectively.
| Three months ended March 31, 2022 | |||||||||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | $ | $ | ||||||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | $ | ( | $ | |||||||||||||||||||
| Derivative designated as hedging instrument | ( | ||||||||||||||||||||||
| 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 | $ | $ | $ | ||||||||||||||||||||
| Derivative designated as hedging instrument | ( | ||||||||||||||||||||||
| Three months ended March 31, 2021 | |||||||||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | $ | $ | ||||||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | $ | $ | ||||||||||||||||||||
| Derivative designated as hedging instrument | ( | ( | |||||||||||||||||||||
| 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 | $ | $ | $ | ||||||||||||||||||||
| Derivative designated as hedging instrument | ( | ||||||||||||||||||||||
18
The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:
| Gain (loss) recognized in Consolidated Statements of Income | Consolidated Statements of Income classification | ||||||||||||||||||||||
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Gain (loss) on derivatives not designated as hedges | |||||||||||||||||||||||
| Currency exchange contracts | $ | ( | $ | ( | Interest expense - net | ||||||||||||||||||
| Commodity Contracts | Cost of products sold | ||||||||||||||||||||||
| Total | $ | ( | $ | ( | |||||||||||||||||||
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 | Location of gain (loss) reclassified from Accumulated other comprehensive loss | Gain (loss) reclassified from Accumulated other comprehensive loss | |||||||||||||||||||||||||||
| Three months ended March 31 | Three months ended March 31 | ||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| Derivatives designated as cash flow hedges | |||||||||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | $ | $ | Interest expense - net | $ | $ | ||||||||||||||||||||||||
| Currency exchange contracts | ( | Net sales and Cost of products sold | ( | ||||||||||||||||||||||||||
| Commodity contracts | Cost of products sold | ||||||||||||||||||||||||||||
| Non-derivative designated as net investment hedges | |||||||||||||||||||||||||||||
| Foreign currency denominated debt | Interest expense - net | ||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ( | ||||||||||||||||||||||||
At March 31, 2022, a gain of $14 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.
19
Note 13. 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 $310 million. These restructuring activities are expected to incur additional expenses of $40 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $350 million for the entire program.
A summary of restructuring program charges is as follows:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Workforce reductions | $ | $ | |||||||||||||||||||||
| Plant closing and other | |||||||||||||||||||||||
| Total before income taxes | |||||||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Total after income taxes | $ | $ | |||||||||||||||||||||
| Per ordinary share - diluted | $ | $ | |||||||||||||||||||||
Restructuring program charges related to the following segments:
| Three months ended March 31 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Electrical Americas | $ | $ | |||||||||||||||||||||||||||||||||
| Electrical Global | |||||||||||||||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||||||||||||||
| Vehicle | |||||||||||||||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||||||||||||||
| Total | $ | $ | |||||||||||||||||||||||||||||||||
A summary of liabilities related to workforce reductions, plant closing and other associated costs is as follows:
| (In millions) | Workforce reductions | Plant closing and other | Total | ||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ||||||||||||||
| Liability recognized | |||||||||||||||||
| Payments, utilization and translation | ( | ( | ( | ||||||||||||||
| Balance at December 31, 2020 | $ | $ | $ | ||||||||||||||
| Liability recognized | |||||||||||||||||
| Payments, utilization and translation | ( | ( | ( | ||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | ||||||||||||||
| Liability recognized | |||||||||||||||||
| Payments, utilization and translation | ( | ( | ( | ||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ||||||||||||||
These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other income - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 14 for additional information about business segments.
20
Note 14. BUSINESS SEGMENT INFORMATION
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton's operating segments are Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility. On August 2, 2021, Eaton completed the sale of the Hydraulics business. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton's business segments, see Note 17 to the Consolidated Financial Statements contained in the 2021 Form 10-K.
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Electrical Americas | $ | $ | |||||||||||||||||||||
| Electrical Global | |||||||||||||||||||||||
| Hydraulics | |||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Vehicle | |||||||||||||||||||||||
| eMobility | |||||||||||||||||||||||
| Total net sales | $ | $ | |||||||||||||||||||||
| Segment operating profit (loss) | |||||||||||||||||||||||
| Electrical Americas | $ | $ | |||||||||||||||||||||
| Electrical Global | |||||||||||||||||||||||
| Hydraulics | |||||||||||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Vehicle | |||||||||||||||||||||||
| eMobility | ( | ( | |||||||||||||||||||||
| Total segment operating profit | |||||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Intangible asset amortization expense | ( | ( | |||||||||||||||||||||
| Interest expense - net | ( | ( | |||||||||||||||||||||
| Pension and other postretirement benefits income | |||||||||||||||||||||||
| Restructuring program charges | ( | ( | |||||||||||||||||||||
| Other expense - net | ( | ( | |||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Less net income for noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | $ | |||||||||||||||||||||
21
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is 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.
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. During 2021 and 2022, Eaton has completed a number of transactions to strengthen its portfolio.
| Acquisitions of businesses and investments in associate companies | Date of acquisition | Business segment | ||||||||||||
| Tripp Lite | March 17, 2021 | Electrical 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 SA | March 22, 2021 | Electrical Global | ||||||||||||
A leading designer and manufacturer of electric vehicle charging hardware and related software. | ||||||||||||||
| HuanYu High Tech | March 29, 2021 | Electrical 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. | ||||||||||||||
| Mission Systems | June 1, 2021 | Aerospace | ||||||||||||
A leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. | ||||||||||||||
| Jiangsu YiNeng Electric's busway business | June 25, 2021 | Electrical Global | ||||||||||||
A 50 percent stake in Jiangsu YiNeng Electric's busway business which manufactures and markets busway products in China. | ||||||||||||||
| Royal Power Solutions | January 5, 2022 | eMobility | ||||||||||||
A manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets. | ||||||||||||||
| Divestiture of business | Date of divestiture | Business segment | ||||||||||||
Hydraulics business | August 2, 2021 | Hydraulics | ||||||||||||
Additional information related to acquisitions and divestiture of businesses is presented in Note 2.
22
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 $310 million. These restructuring activities are expected to incur additional expenses of $40 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $350 million for the entire program. The projected mature year savings from these restructuring actions are expected to be $250 million when fully implemented in 2023. Additional information related to this restructuring is presented in Note 13.
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:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Net sales | $ | 4,843 | $ | 4,692 | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | 532 | 458 | |||||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 1.33 | $ | 1.14 | |||||||||||||||||||
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. 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:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Acquisition integration, divestiture charges and transaction costs | $ | 29 | $ | 46 | |||||||||||||||||||
| Gain on the sale of the Hydraulics business | (24) | — | |||||||||||||||||||||
| Total before income taxes | 5 | 46 | |||||||||||||||||||||
| Income tax benefit | 1 | 9 | |||||||||||||||||||||
| Total after income taxes | $ | 4 | $ | 37 | |||||||||||||||||||
| Per ordinary share - diluted | $ | 0.01 | $ | 0.09 | |||||||||||||||||||
Acquisition integration, divestiture charges and transaction costs in 2022 are primarily related to the acquisitions of Royal Power Solutions, Souriau-Sunbank Connection Technologies, Green Motion, Tripp Lite, and Mission Systems, and other charges to acquire and exit businesses. Charges in 2021 are primarily related to the divestiture of the Hydraulics business, the acquisitions of Tripp Lite, Mission Systems, Souriau-Sunbank Connection Technologies, and Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., and other charges to exit businesses. These charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other income - net. In Business Segment Information in Note 14, the charges were included in Other expense - net.
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Intangible Asset Amortization Expense
Intangible asset amortization expense is as follows:
| Three months ended March 31 | |||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||
| Intangible asset amortization expense | $ | 128 | $ | 92 | |||||||||||||||||||
| Income tax benefit | 29 | 22 | |||||||||||||||||||||
| Total after income taxes | $ | 99 | $ | 70 | |||||||||||||||||||
| Per ordinary share - diluted | $ | 0.25 | $ | 0.18 | |||||||||||||||||||
Consolidated Financial Results
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions except for per share data) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 4,843 | $ | 4,692 | 3 | % | |||||||||||||||||||||||||||||
| Gross profit | 1,574 | 1,508 | 4 | % | |||||||||||||||||||||||||||||||
| Percent of net sales | 32.5 | % | 32.1 | % | |||||||||||||||||||||||||||||||
| Income before income taxes | 619 | 538 | 15 | % | |||||||||||||||||||||||||||||||
| Net income | 533 | 459 | 16 | % | |||||||||||||||||||||||||||||||
| Less net income for noncontrolling interests | (1) | (1) | |||||||||||||||||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | 532 | 458 | 16 | % | |||||||||||||||||||||||||||||||
| Excluding acquisition and divestiture charges, after-tax | 4 | 37 | |||||||||||||||||||||||||||||||||
| Excluding restructuring program charges, after-tax | 14 | 12 | |||||||||||||||||||||||||||||||||
| Excluding intangible asset amortization expense, after-tax | 99 | 70 | |||||||||||||||||||||||||||||||||
| Adjusted earnings | $ | 649 | $ | 577 | 12 | % | |||||||||||||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders - diluted | $ | 1.33 | $ | 1.14 | 17 | % | |||||||||||||||||||||||||||||
| Excluding per share impact of acquisition and divestiture charges, after-tax | 0.01 | 0.09 | |||||||||||||||||||||||||||||||||
| Excluding per share impact of restructuring program charges, after-tax | 0.03 | 0.03 | |||||||||||||||||||||||||||||||||
| Excluding per share impact of intangible asset amortization expense, after-tax | 0.25 | 0.18 | |||||||||||||||||||||||||||||||||
| Adjusted earnings per ordinary share | $ | 1.62 | $ | 1.44 | 13 | % | |||||||||||||||||||||||||||||
Net Sales
| Changes in Net sales are summarized as follows: | Three months ended March 31 | |||||||||||||||||||||||||||||||
| 2022 | ||||||||||||||||||||||||||||||||
| Organic growth | 10 | % | ||||||||||||||||||||||||||||||
Acquisitions of businesses | 6 | % | ||||||||||||||||||||||||||||||
| Divestiture of business | (12) | % | ||||||||||||||||||||||||||||||
| Foreign currency | (1) | % | ||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 3 | % | ||||||||||||||||||||||||||||||
Organic sales increased 10% in the first quarter of 2022 due to broad-based strength in end-markets of the Electrical Americas and Electrical Global business segments, and the impact of the continued recovery of commercial aviation from the reduction of travel restrictions from the COVID-19 pandemic in the Aerospace business segment. Despite strong growth, many of our businesses continue to be impacted by supply chain disruptions or shortages, inflation, labor shortages, and plant shutdowns associated with lockdowns in various cities around the globe.
The acquisitions of Tripp Lite, Mission Systems, and Royal Power Solutions increased sales in the first quarter of 2022, while the divestiture of the Hydraulics business reduced sales.
24
Gross Profit
Gross profit margin increased from 32.1% in the first quarter of 2021 to 32.5% in the first quarter of 2022 primarily due to higher organic sales. Gross profit also improved due to the net impact of the acquisition of Tripp Lite and Royal Power Solutions and the divestiture of the Hydraulics business. Conversely, commodity and logistics inflation had an unfavorable impact on gross margin during the first quarter of 2022, despite offsetting pricing actions.
Income Taxes
The effective income tax rate for the first quarter of 2022 was expense of 13.9% compared to expense of 14.7% for the first quarter of 2021. The decrease in the effective tax rate in the first quarter of 2022 was primarily due to the excess tax benefits recognized for employee share-based payments in the first quarter of 2022.
Net Income
Net income attributable to Eaton ordinary shareholders of $532 million in the first quarter of 2022 increased 16% compared to Net income attributable to Eaton ordinary shareholders of $458 million in the first quarter of 2021. The increase in the first quarter of 2022 was primarily due to higher gross profit and lower acquisition and divestiture charges, partially offset by higher intangible asset amortization expense.
Net income per ordinary share increased to $1.33 in the first quarter of 2022 compared to $1.14 in the first quarter of 2021. The increase in Net income per ordinary share in the first quarter of 2022 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past year.
Adjusted Earnings
Adjusted earnings of $649 million in the first quarter of 2022 increased 12% compared to Adjusted earnings of $577 million in the first quarter of 2021. The increase in Adjusted earnings in the first quarter of 2022 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 per ordinary share increased to $1.62 in the first quarter of 2022 compared to $1.44 in the first quarter of 2021. The increase in Adjusted earnings per ordinary share in the first quarter of 2022 was due to higher Adjusted earnings and the impact of the Company's share repurchases over the past year.
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment.
Electrical Americas
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 1,891 | $ | 1,622 | 17 | % | |||||||||||||||||||||||||||||
| Operating profit | $ | 361 | $ | 332 | 9 | % | |||||||||||||||||||||||||||||
| Operating margin | 19.1 | % | 20.5 | % | |||||||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: | Three months ended March 31 | ||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Organic growth | 10 | % | |||||||||||||||||||||||||||||||||
Acquisition of Tripp Lite | 7 | % | |||||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 17 | % | |||||||||||||||||||||||||||||||||
The increase in organic sales in the first quarter of 2022 reflects broad-based strength in end-markets, with particular strength in residential and industrial.
The operating margin decreased from 20.5% in the first quarter of 2021 to 19.1% in the first quarter of 2022 primarily due to commodity and logistics inflation, supply chain disruptions, and increased costs for growth related investments, partially offset by higher organic sales and the acquisition of Tripp Lite.
25
Electrical Global
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 1,437 | $ | 1,253 | 15 | % | |||||||||||||||||||||||||||||
| Operating profit | $ | 279 | $ | 213 | 31 | % | |||||||||||||||||||||||||||||
| Operating margin | 19.4 | % | 17.0 | % | |||||||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: | Three months ended March 31 | ||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Organic growth | 18 | % | |||||||||||||||||||||||||||||||||
| Foreign currency | (3) | % | |||||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 15 | % | |||||||||||||||||||||||||||||||||
The increase in organic sales in the first quarter of 2022 was primarily due to broad-based strength in end-markets, with particular strength in commercial and industrial markets, including oil and gas.
The operating margin increased from 17.0% in the first quarter of 2021 to 19.4% in the first quarter of 2022 primarily due to higher organic sales.
Hydraulics
On August 2, 2021, Eaton completed the sale of the Hydraulics business segment. For the three months ended March 31, 2021, the Hydraulics segment generated net sales of $561 million and operating profit of $84 million.
Aerospace
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 718 | $ | 519 | 38 | % | |||||||||||||||||||||||||||||
| Operating profit | $ | 159 | $ | 96 | 66 | % | |||||||||||||||||||||||||||||
| Operating margin | 22.1 | % | 18.5 | % | |||||||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: | Three months ended March 31 | ||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Organic growth | 15 | % | |||||||||||||||||||||||||||||||||
Acquisition of Mission Systems | 25 | % | |||||||||||||||||||||||||||||||||
| Foreign currency | (2) | % | |||||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 38 | % | |||||||||||||||||||||||||||||||||
The increase in organic sales in the first quarter of 2022 was primarily due to the continued recovery of commercial aviation from the reduction of travel restrictions from the COVID-19 pandemic.
The operating margin increased from 18.5% in the first quarter of 2021 to 22.1% in the first quarter of 2022 primarily due to higher organic sales volumes and favorable product mix.
26
Vehicle
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 671 | $ | 654 | 3 | % | |||||||||||||||||||||||||||||
| Operating profit | $ | 113 | $ | 113 | — | % | |||||||||||||||||||||||||||||
| Operating margin | 16.8 | % | 17.3 | % | |||||||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: | Three months ended March 31 | ||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Organic growth | 3 | % | |||||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 3 | % | |||||||||||||||||||||||||||||||||
The increase in organic sales in the first quarter of 2022 was primarily due to strength in the North American truck aftermarket and the South American truck, bus and agriculture markets, partially offset by weakness in global light vehicle markets.
The operating margin decreased from 17.3% in the first quarter of 2021 to 16.8% in the first quarter of 2022 primarily due to commodity and logistics inflation, partially offset by higher organic sales.
eMobility
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Net sales | $ | 126 | $ | 83 | 52 | % | |||||||||||||||||||||||||||||
| Operating profit (loss) | $ | (3) | $ | (7) | 57 | % | |||||||||||||||||||||||||||||
| Operating margin | (2.4) | % | (8.4) | % | |||||||||||||||||||||||||||||||
| Changes in Net sales are summarized as follows: | Three months ended March 31 | ||||||||||||||||||||||||||||||||||
| 2022 | |||||||||||||||||||||||||||||||||||
| Organic growth | 7 | % | |||||||||||||||||||||||||||||||||
Acquisition of Royal Power Solutions | 46 | % | |||||||||||||||||||||||||||||||||
| Foreign currency | (1) | % | |||||||||||||||||||||||||||||||||
| Total increase (decrease) in Net sales | 52 | % | |||||||||||||||||||||||||||||||||
The increase in organic sales in the first quarter of 2022 was primarily due to strength in North America truck and off road markets.
The operating margin increased from negative 8.4% in the first quarter of 2021 to negative 2.4% in the first quarter of 2022 primarily due to the acquisition of Royal Power Solutions.
27
Corporate Expense
| Three months ended March 31 | Increase (decrease) | ||||||||||||||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||||||||||||||
| Intangible asset amortization expense | $ | 128 | $ | 92 | 39 | % | |||||||||||||||||||||||||||||
| Interest expense - net | 32 | 38 | (16) | % | |||||||||||||||||||||||||||||||
| Pension and other postretirement benefits income | (19) | (14) | 36 | % | |||||||||||||||||||||||||||||||
| Restructuring program charges | 18 | 16 | 13 | % | |||||||||||||||||||||||||||||||
| Other expense - net | 131 | 161 | (19) | % | |||||||||||||||||||||||||||||||
| Total corporate expense | $ | 290 | $ | 293 | (1) | % | |||||||||||||||||||||||||||||
Total corporate expense was $290 million in the first quarter of 2022 compared to Total corporate expense of $293 million in the first quarter of 2021. The decrease in Total corporate expense for the first quarter of 2022 was primarily due to lower Other expense - net, lower Interest expense - net, and higher Pension and other postretirement benefits income, partially offset by higher Intangible asset amortization expense. The decrease in Other expense - net is primarily due to the 2022 gain on sale of the Hydraulics business discussed in Note 2 and lower acquisition and divestiture charges.
28
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.
The Company maintains revolving credit facilities consisting of a $500 million 364-day revolving credit facility that will expire on October 3, 2022 and a $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 March 31, 2022. The Company maintains access to the commercial paper markets through its $2,500 million commercial paper program, of which $1,096 million was outstanding on March 31, 2022.
Eaton received proceeds of $3.1 billion from the sale of its Hydraulics business in 2021. The Company paid $4.45 billion to acquire Tripp Lite and Mission Systems in 2021, and $612 million to acquire Royal Power Solutions in 2022.
Over the course of a year, cash, short-term investments, and short-term debt may fluctuate in order to manage global liquidity. As of March 31, 2022 and December 31, 2021, Eaton had cash of $237 million and $297 million, short-term investments of $268 million and $271 million, and short-term debt of $1,116 million and $13 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.
Eaton was in compliance with each of its debt covenants for all periods presented.
Cash Flows
A summary of cash flows is as follows:
| Three months ended March 31 | |||||||||||||||||
| (In millions) | 2022 | 2021 | Change from 2021 | ||||||||||||||
| Net cash provided by operating activities | $ | 42 | $ | 260 | $ | (218) | |||||||||||
| Net cash used in investing activities | (762) | (2,201) | 1,439 | ||||||||||||||
| Net cash provided by financing activities | 652 | 1,875 | (1,223) | ||||||||||||||
| Effect of currency on cash | 8 | (11) | 19 | ||||||||||||||
| Increase in cash classified as held for sale | — | (7) | 7 | ||||||||||||||
| Total decrease in cash | $ | (60) | $ | (84) | |||||||||||||
Operating Cash Flow
Net cash provided by operating activities decreased by $218 million in the first three months of 2022 compared to 2021. The decrease in net cash provided by operating activities in the first three months of 2022 was primarily due to higher working capital balances to support the Company’s organic growth, partially offset by lower pension contributions in 2022 due to a $200 million contribution to Eaton's U.S. qualified pension plan in 2021, cash received from the termination of interest rate swaps in 2022, and higher net income in 2022.
Investing Cash Flow
Net cash used in investing activities decreased by $1,439 million in the first three months of 2022 compared to 2021. The decrease in the use of cash in the first three months of 2022 was primarily driven by cash paid in 2022 for business acquisitions of $612 million compared to cash paid in 2021 for business acquisitions of $1,700 million, and net purchases of short-term investments of $1 million in 2022 compared to $280 million in 2021.
Financing Cash Flow
Net cash provided by financing activities decreased by $1,223 million in the first three months of 2022 compared to 2021. The decrease in the source of cash in the first three months of 2022 was primarily due to no proceeds from borrowings in 2022 compared to proceeds from borrowings of $1,798 million in 2021, partially offset by net proceeds of short-term debt of $1,105 million in 2022 compared to $463 million in 2021.
29
Uses of Cash
Capital Expenditures
Capital expenditures were $115 million and $119 million in the first three months of 2022 and 2021, respectively. Eaton expects approximately $650 million in capital expenditures in 2022.
Dividends
Cash dividend payments were $320 million and $300 million in the first three months of 2022 and 2021, 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. 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). 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). Under the 2022 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. In the first three months of 2022, 0.6 million ordinary shares were repurchased under the 2022 program in the open market at a total cost of $86 million. In the first three months of 2021, 0.5 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $59 million. The Company will continue to pursue share repurchases in 2022 depending on market conditions and capital levels.
Acquisition of Businesses
The Company paid cash of $612 million and $1,700 million to acquire businesses in the first three months of 2022 and 2021, 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. At March 31, 2022, the Company had Short-term debt of $1,116 million, Current portion of long-term debt of $1,728 million, and Long-term debt of $6,763 million.
30
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 Condensed Consolidated Statements of Cash Flows. At March 31, 2022 and December 31, 2021, Accounts payable included $168 million and $151 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 March 31, 2022, 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 Form 10-K filed on February 24, 2021 (10-K Exhibit 22), 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 the 10-K 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) | March 31, 2022 | December 31, 2021 | ||||||||||||
| Current assets | $ | 3,264 | $ | 3,032 | ||||||||||
| Noncurrent assets | 11,578 | 11,553 | ||||||||||||
| Current liabilities | 4,944 | 3,950 | ||||||||||||
| Noncurrent liabilities | 8,349 | 8,461 | ||||||||||||
| Amounts due to subsidiaries that are non-issuers and non-guarantors - net | 16,621 | 18,006 | ||||||||||||
| Three months ended March 31 | ||||||||||||||
| (In millions) | 2022 | |||||||||||||
| Net sales | $ | 2,550 | ||||||||||||
| Sales to subsidiaries that are non-issuers and non-guarantors | 215 | |||||||||||||
| Cost of products sold | 2,125 | |||||||||||||
| Expense from subsidiaries that are non-issuers and non-guarantors - net | 89 | |||||||||||||
| Net income | 42 | |||||||||||||
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.
FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning litigation, expected capital expenditures, future dividend payments, anticipated share repurchases, and expected restructuring charges and benefits. 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, including government responses thereto and the rate of global economic recovery therefrom; 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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ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in exposures to market risk since December 31, 2021.
ITEM 4.CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Craig Arnold - Principal Executive Officer; and 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, management concluded that Eaton’s disclosure controls and procedures were effective as of March 31, 2022.
Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
During the first quarter of 2022, 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 businesses acquired in the past twelve months on Eaton's internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1.LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 8 of the Notes to the condensed consolidated financial statements.
ITEM 1A.RISK FACTORS.
“Item 1A. Risk Factors” in Eaton's 2021 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 2021 Form 10-K, except as follows:
Eaton uses a variety of raw materials and components in its businesses, and significant shortages, price increases or supplier insolvencies, or similar challenges for our customers could adversely impact our results of operations.
Eaton's major requirements for raw materials are described in Item 1 “Raw Materials” of our Form 10-K for the year ended December 31, 2021. Shortages have affected the prices Eaton's businesses are charged as global economies recover from the COVID-19 pandemic.
Additionally, some of our suppliers of component parts and logistics have increased their prices in response to increases in their costs of raw materials, energy and/or labor. If we are unable to increase prices commensurately with increased costs without compromising the competitive position of our products and services, our results could be negatively impacted. These economic conditions have also impacted customers in certain of our end markets, potentially affecting short-term demand for some of our products. These conditions may be exacerbated by Russia's invasion of Ukraine and the related economic and other retaliatory measures taken by the United States, the European Union and other nations. While Russia's invasion of Ukraine has not had a material impact on Eaton’s results to date, it is impossible to determine its outcome, or how it will affect global macroeconomic conditions generally in the future. Should these trends continue or worsen, the Company and/or some of our customers may be impacted, which could have a material adverse impact on our operating results.
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ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
During the first quarter of 2022, 0.6 million ordinary shares were repurchased in the open market at a total cost of $86 million. These shares were repurchased under the program approved by the Board on February 23, 2022 (the 2022 Program). A summary of the shares repurchased in the first quarter of 2022 is as follows:
| Month | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions) | ||||||||||||||||||||||
| January | — | $ | — | — | $ | 1,972 | ||||||||||||||||||||
| February | — | $ | — | — | $ | 5,000 | ||||||||||||||||||||
| March | 584,539 | $ | 147.22 | 584,539 | $ | 4,914 | ||||||||||||||||||||
| Total | 584,539 | $ | 147.22 | 584,539 | ||||||||||||||||||||||
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ITEM 6.EXHIBITS.
Eaton Corporation plc
First Quarter 2022 Report on Form 10-Q
| 3 (i) | |||||||||||
| 3 (ii) | |||||||||||
| 4.1 | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 4.5 | |||||||||||
| 4.6 | |||||||||||
| 4.7 | |||||||||||
| 4.8 | Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its long-term debt other than those set forth in Exhibits (4.2 - 4.7) hereto | ||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 22 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
35
| 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 Label Definition Document * | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document * | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document * | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||||||||
_______________________________
| * | Submitted electronically herewith. | |||||||
36
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: | May 3, 2022 | By: | /s/ Thomas B. Okray | |||||||||||
| Thomas B. Okray | ||||||||||||||
| Principal Financial Officer | ||||||||||||||
| (On behalf of the registrant and as Principal Financial Officer) | ||||||||||||||
37
Eaton Corporation plc
First Quarter 2022 Report on Form 10-Q
Exhibit 31.1
Certification
I, Craig Arnold, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Eaton Corporation plc;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 3, 2022 | /s/ Craig Arnold | |||||||||
| Craig Arnold | |||||||||||
| Principal Executive Officer | |||||||||||
Eaton Corporation plc
First Quarter 2022 Report on Form 10-Q
Exhibit 31.2
Certification
I, Thomas B. Okray, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Eaton Corporation plc;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: | May 3, 2022 | /s/ Thomas B. Okray | |||||||||
| Thomas B. Okray | |||||||||||
| Principal Financial Officer | |||||||||||
Eaton Corporation plc
First Quarter 2022 Report on Form 10-Q
Exhibit 32.1
Certification
This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation plc’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (“10-Q Report”).
I hereby certify that, based on my knowledge, the 10-Q Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation plc and its consolidated subsidiaries.
| Date: | May 3, 2022 | /s/ Craig Arnold | |||||||||
| Craig Arnold | |||||||||||
| Principal Executive Officer | |||||||||||
Eaton Corporation plc
First Quarter 2022 Report on Form 10-Q
Exhibit 32.2
Certification
This written statement is submitted in accordance with Section 906 of the Sarbanes-Oxley Act of 2002. It accompanies Eaton Corporation plc’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (“10-Q Report”).
I hereby certify that, based on my knowledge, the 10-Q Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C 78m), and information contained in the 10-Q Report fairly presents, in all material respects, the financial condition and results of operations of Eaton Corporation plc and its consolidated subsidiaries.
| Date: | May 3, 2022 | /s/ Thomas B. Okray | |||||||||
| Thomas B. Okray | |||||||||||
| Principal Financial Officer | |||||||||||