Item 16. Form 10-K Summary.

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Item 16. Form 10-K Summary.

Not applicable.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



			EATON CORPORATION plc
			Registrant

Date:	February 28, 2018	By:	/s/ Richard H. Fearon
			Richard H. Fearon
			(On behalf of the registrant and as Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Date: February 28, 2018



Signature	Title

*		/s/ Richard H. Fearon
Craig Arnold	Chairman, Principal Executive Officer; Director	Richard H. Fearon	Principal Financial Officer, Director

/s/ Ken D. Semelsberger		*
Ken D. Semelsberger	Principal Accounting Officer	Todd M. Bluedorn	Director

*		*
Christopher M. Connor	Director	Michael J. Critelli	Director

*		*
Charles E. Golden	Director	Arthur E. Johnson	Director

*		/s/ Gregory R. Page
Deborah L. McCoy	Director	Gregory R. Page	Director

*		*
Sandra Pianalto	Director	Gerald B. Smith	Director

*
Dorothy C. Thompson	Director



*By		/s/ Richard H. Fearon
		Richard H. Fearon, Attorney-in-Fact for the officers and directors signing in the capacities indicated

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Eaton Corporation plc

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Eaton Corporation plc (“the Company”) as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2018 expressed an unqualified opinion thereon.

Change in Accounting Principle

As discussed in Notes 1 and 14 to the consolidated financial statements, in 2017 the Company elected to change its method of accounting for certain inventories in the United States to the first-in, first-out (“FIFO”) method, while in prior years, these inventories were accounted for using the last-in, first-out (“LIFO”) method.

Basis for Opinion

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

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

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 1923.

Cleveland, Ohio

February 28, 2018

MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS

We have prepared the accompanying consolidated financial statements and related information of Eaton Corporation plc ("Eaton") included herein for the three years ended December 31, 2017. The primary responsibility for the integrity of the financial information included in this annual report rests with management. The financial information included in this annual report has been prepared in accordance with accounting principles generally accepted in the United States based on our best estimates and judgments and giving due consideration to materiality. The opinion of Ernst & Young LLP, Eaton's independent registered public accounting firm, on those financial statements is included herein.

Eaton has high standards of ethical business practices supported by the Eaton Code of Ethics and corporate policies. Careful attention is given to selecting, training and developing personnel, to ensure that management's objectives of establishing and maintaining adequate internal controls and unbiased, uniform reporting standards are attained. Our policies and procedures provide reasonable assurance that operations are conducted in conformity with applicable laws and with the Company's commitment to a high standard of business conduct.

The Board of Directors pursues its responsibility for the quality of Eaton's financial reporting primarily through its Audit Committee, which is composed of five independent directors. The Audit Committee meets regularly with management, the internal auditors and the independent registered public accounting firm to ensure that they are meeting their responsibilities and to discuss matters concerning accounting, control, audits and financial reporting. The internal auditors and independent registered public accounting firm have full and free access to senior management and the Audit Committee.



/s/ Craig Arnold	/s/ Richard H. Fearon	/s/ Ken D. Semelsberger
Principal Executive Officer	Principal Financial Officer	Principal Accounting Officer

February 28, 2018

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of Eaton Corporation plc

Opinion on Internal Control over Financial Reporting

We have audited Eaton Corporation plc’s (“the Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017 and the related notes and our report dated February 28, 2018 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Cleveland, Ohio

February 28, 2018

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of Eaton Corporation plc ("Eaton") is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act rules 13a-15(f)).

Under the supervision and with the participation of Eaton's management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. In conducting this evaluation, we used the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (2013 Framework). Based on this evaluation under the framework referred to above, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2017.

The independent registered public accounting firm Ernst & Young LLP has issued an audit report on the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. This report is included herein.



/s/ Craig Arnold	/s/ Richard H. Fearon	/s/ Ken D. Semelsberger
Principal Executive Officer	Principal Financial Officer	Principal Accounting Officer

February 28, 2018

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF INCOME



	Year ended December 31
(In millions except for per share data)	2017			2016*			2015*
Net sales	$	20,404		$	19,747		$	20,855

Cost of products sold	13,756			13,409			14,304
Selling and administrative expense	3,565			3,505			3,596
Research and development expense	584			589			625
Interest expense - net	246			233			232
Gain on sale of business	1,077			—			—
Other income - net	(38		)	(107		)	(35		)
Income before income taxes	3,368			2,118			2,133
Income tax expense	382			199			159
Net income	2,986			1,919			1,974
Less net income for noncontrolling interests	(1		)	(3		)	(2		)
Net income attributable to Eaton ordinary shareholders	$	2,985		$	1,916		$	1,972

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	6.68		$	4.20		$	4.22
Basic	6.71			4.21			4.23

Weighted-average number of ordinary shares outstanding
Diluted	447.0			456.5			467.1
Basic	444.5			455.0			465.5

Cash dividends declared per ordinary share	$	2.40		$	2.28		$	2.20

*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Year ended December 31
(In millions)	2017			2016*			2015*
Net income	$	2,986		$	1,919		$	1,974
Less net income for noncontrolling interests	(1		)	(3		)	(2		)
Net income attributable to Eaton ordinary shareholders	2,985			1,916			1,972

Other comprehensive income (loss), net of tax
Currency translation and related hedging instruments	807			(570		)	(1,078		)
Pensions and other postretirement benefits	241			(6		)	111
Cash flow hedges	(4		)	(9		)	3
Other comprehensive income (loss) attributable to Eaton ordinary shareholders	1,044			(585		)	(964		)

Total comprehensive income attributable to Eaton ordinary shareholders	$	4,029		$	1,331		$	1,008

*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

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

EATON CORPORATION plc

CONSOLIDATED BALANCE SHEETS



	December 31
(In millions)	2017			2016*
Assets
Current assets
Cash	$	561		$	543
Short-term investments	534			203
Accounts receivable - net	3,943			3,560
Inventory	2,620			2,346
Prepaid expenses and other current assets	679			381
Total current assets	8,337			7,033

Property, plant and equipment
Land and buildings	2,491			2,369
Machinery and equipment	6,014			5,670
Gross property, plant and equipment	8,505			8,039
Accumulated depreciation	(5,003		)	(4,596		)
Net property, plant and equipment	3,502			3,443

Other noncurrent assets
Goodwill	13,568			13,201
Other intangible assets	5,265			5,514
Deferred income taxes	253			325
Other assets	1,698			960
Total assets	$	32,623		$	30,476

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	6		$	14
Current portion of long-term debt	578			1,552
Accounts payable	2,166			1,718
Accrued compensation	453			379
Other current liabilities	1,872			1,822
Total current liabilities	5,075			5,485

Noncurrent liabilities
Long-term debt	7,167			6,711
Pension liabilities	1,226			1,659
Other postretirement benefits liabilities	362			368
Deferred income taxes	538			321
Other noncurrent liabilities	965			934
Total noncurrent liabilities	10,258			9,993

Shareholders’ equity
Ordinary shares (439.9 million outstanding in 2017 and 449.4 million in 2016)	4			5
Capital in excess of par value	11,987			11,845
Retained earnings	8,669			7,555
Accumulated other comprehensive loss	(3,404		)	(4,448		)
Shares held in trust	(3		)	(3		)
Total Eaton shareholders’ equity	17,253			14,954
Noncontrolling interests	37			44
Total equity	17,290			14,998
Total liabilities and equity	$	32,623		$	30,476

*December 31, 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF CASH FLOWS



	Year ended December 31
(In millions)	2017			2016*			2015*
Operating activities
Net income	$	2,986		$	1,919		$	1,974
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	914			929			925
Deferred income taxes	(206		)	(83		)	(105		)
Pension and other postretirement benefits expense	208			235			323
Contributions to pension plans	(473		)	(262		)	(330		)
Contributions to other postretirement benefits plans	(20		)	(30		)	(31		)
Gain on sale of businesses	(843		)	—			—
Changes in working capital
Accounts receivable - net	(231		)	(170		)	5
Inventory	(202		)	34			(8		)
Accounts payable	388			—			(120		)
Accrued compensation	59			20			(28		)
Accrued income and other taxes	(4		)	30			(9		)
Other current assets	2			(21		)	7
Other current liabilities	(203		)	(44		)	(38		)
Other - net	291			13			(156		)
Net cash provided by operating activities	2,666			2,570			2,409

Investing activities
Capital expenditures for property, plant and equipment	(520		)	(497		)	(506		)
Proceeds from sale of business	607			—			1
Cash received from (paid for) acquisitions of businesses, net of cash acquired	—			1			(72		)
Sales (purchases) of short-term investments - net	(298		)	(40		)	37
Other - net	(6		)	7			(35		)
Net cash used in investing activities	(217		)	(529		)	(575		)

Financing activities
Proceeds from borrowings	1,000			631			425
Payments on borrowings	(1,554		)	(653		)	(1,027		)
Cash dividends paid	(1,068		)	(1,037		)	(1,026		)
Exercise of employee stock options	66			74			52
Repurchase of shares	(850		)	(730		)	(682		)
Employee taxes paid from shares withheld	(22		)	(18		)	(38		)
Other - net	(14		)	(5		)	(9		)
Net cash used in financing activities	(2,442		)	(1,738		)	(2,305		)

Effect of currency on cash	11			(28		)	(42		)
Total increase (decrease) in cash	18			275			(513		)
Cash at the beginning of the period	543			268			781
Cash at the end of the period	$	561		$	543		$	268

*Year ended December 31, 2016 and 2015 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF 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*

(In millions)	Shares		Dollars
Balance at January 1, 2015 (originally reported)	467.9		$	5		$	11,605		$	7,078		$	(2,899	)	$	(3	)	$	15,786		$	53		$	15,839
Inventory accounting method change*	—		—			—			70			—			—			70			—			70
Balance at January 1, 2015*	467.9		5			11,605			7,148			(2,899		)	(3		)	15,856			53			15,909
Net income*	—		—			—			1,972			—			—			1,972			2			1,974
Other comprehensive loss, net of tax												(964		)				(964		)	—			(964		)
Cash dividends paid	—		—			—			(1,026		)	—			—			(1,026		)	(9		)	(1,035		)
Issuance of shares under equity-based compensation plans - net (net of income tax benefit of $1)	2.2		—			99			(3		)	—			—			96			—			96
Changes in noncontrolling interest of consolidated subsidiaries - net	—		—			(3		)	—			—			—			(3		)	(1		)	(4		)
Repurchase of shares	(11.3	)	—			—			(682		)	—			—			(682		)	—			(682		)
Balance at December 31, 2015*	458.8		5			11,701			7,409			(3,863		)	(3		)	15,249			45			15,294
Net income*	—		—			—			1,916			—			—			1,916			3			1,919
Other comprehensive loss, net of tax												(585		)				(585		)	—			(585		)
Cash dividends paid	—		—			—			(1,037		)	—			—			(1,037		)	(2		)	(1,039		)
Issuance of shares under equity-based compensation plans - net (net of income tax benefit of $1)	2.4		—			144			(3		)	—			—			141			—			141
Changes in noncontrolling interest of consolidated subsidiaries - net	—		—			—			—			—			—			—			(2		)	(2		)
Repurchase of shares	(11.8	)	—			—			(730		)	—			—			(730		)	—			(730		)
Balance at December 31, 2016*	449.4		5			11,845			7,555			(4,448		)	(3		)	14,954			44			14,998
Cumulative-effect adjustment upon adoption of ASU 2016-09	—		—			—			48			—			—			48			—			48
Net income	—		—			—			2,985			—			—			2,985			1			2,986
Other comprehensive income, net of tax												1,044						1,044			—			1,044
Cash dividends paid	—		—			—			(1,068		)	—			—			(1,068		)	(5		)	(1,073		)
Issuance of shares under equity-based compensation plans	2.0		—			142			(2		)	—			—			140			—			140
Changes in noncontrolling interest of consolidated subsidiaries - net	—		—			—			—			—			—			—			(3		)	(3		)
Repurchase of shares	(11.5	)	(1		)	—			(849		)	—			—			(850		)	—			(850		)
Balance at December 31, 2017	439.9		$	4		$	11,987		$	8,669		$	(3,404	)	$	(3	)	$	17,253		$	37		$	17,290

*The balances at January 1, 2015 and the year ended December 31, 2015 and 2016 amounts have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

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

EATON CORPORATION plc

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Amounts are in millions unless indicated otherwise (per share data assume dilution).


Note 1.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General Information and Basis of Presentation

Eaton Corporation plc (Eaton or the Company) is a power management company with 2017 net sales of $20.4 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical power more efficiently, safely and sustainably. Eaton has approximately 96,000 employees in 59 countries and sells products to customers in more than 175 countries.

The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial statements were filed with the Securities Exchange Commission.

The consolidated financial statements include the accounts of Eaton and all subsidiaries and other entities it controls. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has significant influence and generally a 20% to 50% ownership interest. Equity investments are evaluated for impairment whenever events or circumstances indicate the book value of the investment exceeds fair value. An impairment would exist if there is an other-than-temporary decline in value. Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities. In the ordinary course of business, the Company leases certain real properties and equipment, as described in Note 8.

Eaton's functional currency is United States Dollars (USD). The functional currency for most subsidiaries is their local currency. Financial statements for these subsidiaries are translated at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive loss.

During 2017, the Company adopted Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, (ASU 2016-09). Upon adoption, the Company recorded deferred tax assets of $48 for all excess tax benefits that had not been previously recognized. This was accomplished through a cumulative-effect adjustment to retained earnings. ASU 2016-09 also requires that all excess tax benefits and deficiencies generated in the current and future periods be recorded as income tax benefit or expense in the reporting period in which they occur. These excess tax benefits and deficiencies, which were previously required to be presented as financing activities on the Company’s Consolidated Statements of Cash Flows, are now classified as operating activities prospectively. The Company also reclassified $22, $18, and $38 for 2017, 2016, and 2015, respectively, from operating activities to financing activities on the Company’s Consolidated Statements of Cash Flows for withholding payments made to taxing authorities from shares withheld from employees. The Company will continue to estimate forfeitures as part of recording equity-based compensation expense.

During the fourth quarter of 2017, the Company changed its method of accounting for certain inventory in the United States from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. All prior periods presented have been retrospectively adjusted to apply the new method of accounting. See Note 14 for more information on the change in inventory accounting method.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Revenue Recognition

Sales of products are recognized when a sales agreement is in place, products have been shipped to unaffiliated customers and title has transferred in accordance with shipping terms, the selling price is fixed and determinable and collectability is reasonably assured, all significant related acts of performance have been completed, and no other significant uncertainties exist. Shipping and handling costs billed to customers are included in Net sales and the related costs in Cost of products sold. Although the majority of the sales agreements contain standard terms and conditions, there are agreements that contain multiple elements or non-standard terms and conditions. As a result, judgment is required to determine the appropriate accounting, including whether the deliverables specified in these agreements should be treated as separate units of accounting for recognition purposes, and, if so, how the sales price should be allocated among the elements and when to recognize sales for each element. For delivered elements, sales generally are recognized only when the delivered elements have standalone value and there are no uncertainties regarding customer acceptance. Sales for service contracts generally are recognized as the services are provided.

Eaton records reductions to revenue for customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels.

Goodwill and Indefinite Life Intangible Assets

Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Goodwill is tested for impairment at the reporting unit level, which is equivalent to Eaton's operating segments and based on the net assets for each segment, including goodwill and intangible assets. Goodwill is assigned to each operating segment, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis. Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of an operating segment is less than its carrying amount.

Goodwill impairment testing in 2017 was performed using qualitative analysis, which is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment performed in 2016. The results of the qualitative analysis did not indicate a need to perform a quantitative analysis.

Goodwill impairment testing for 2016 was performed using a quantitative analysis under which the fair value for each reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the operating segment's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows of the respective reporting unit. Sensitivity analyses were performed around these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.

Based on a qualitative analysis performed in 2017 and a quantitative analysis performed in 2016, the fair value of Eaton's reporting units continue to substantially exceed their respective carrying amounts.

Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts. Indefinite life intangible asset impairment testing for 2017 and 2016 was performed using a quantitative analysis. The Company determines the fair value of these assets using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows and profitability. Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. For 2017 and 2016, the fair value of indefinite lived intangible assets exceeded the respective carrying value.

For additional information about goodwill and other intangible assets, see Note 5.

Other Long-Lived Assets

Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings are depreciated generally over 40 years and machinery and equipment over 3 to 10 years. At December 31, 2017, the weighted-average amortization period for intangible assets subject to amortization was 17 years for patents and technology, primarily as a result of the long life of aircraft platforms; 17 years for customer relationships; and 17 years for certain trademarks. Software is generally amortized up to a life of 15 years.

Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Determining asset groups and underlying cash flows requires the use of significant judgment.

Retirement Benefits Plans

For the principal pension plans in the United States, Canada, Puerto Rico and the United Kingdom, the Company uses a market-related value of plan assets to calculate the expected return on assets used to determine net periodic benefit costs. The market-related value of plan assets is a calculated value that recognizes changes in the fair value of plan assets over a five year period. All other plans use fair value of plan assets.

Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor. The Company’s corridors are set at either 8% or 10%, depending on the plan, of the greater of the plan assets or benefit obligations. Gains or losses outside of the corridor are subject to amortization over an average employee future service period that differs by plan, but is approximately 12 years on a weighted average basis. If most or all of the plan’s participants are no longer actively accruing benefits, the average life expectancy is used.

Warranty Accruals

Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts. Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and other events when they are known and estimable. See Note 8 for additional information about warranty accruals.

Asset Retirement Obligations

A conditional asset retirement obligation is recognized at fair value when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized when sufficient information is available to estimate fair value.

Income Taxes

Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to reverse. Deferred income tax assets are recognized for income tax loss carryforwards and income tax credit carryforwards. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. Eaton recognizes the income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates and adjusts these accruals based on changing facts and circumstances. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. Penalties on unrecognized income tax benefits have been accrued for jurisdictions where penalties are automatically applied to any deficiency, regardless of the merit of the position. For additional information about income taxes, see Note 9.

Equity-Based Compensation

Eaton recognizes equity-based compensation expense based on the grant date fair value of the award. Awards with service conditions or both service and market conditions are expensed over the period during which an employee is required to provide service in exchange for the award. Awards with both service and performance conditions are expensed over the period an employee is required to provide service based on the number of units for which achievement of the performance objective is probable. Participants awarded restricted stock units (RSUs) in 2015 and 2016, do not receive dividends; therefore, their fair value is determined by reducing the closing market price of the Company’s ordinary shares on the date of grant by the present value of the estimated dividends had they been paid. The fair value of RSUs awarded in 2017, restricted stock awards (RSAs) and performance stock units (PSUs) with performance conditions are determined based on the closing market price of the Company’s ordinary shares at the date of grant. The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions, which incorporates assumptions regarding expected stock price volatility and the risk-free interest rate. Stock options are granted with an exercise price equal to the closing market price of Eaton ordinary shares on the date of grant. The fair value of stock options is determined using a Black-Scholes option-pricing model, which incorporates assumptions regarding the expected stock price volatility, the expected option life, the risk-free interest rate, and the expected dividend yield. See Note 11 for additional information about equity-based compensation.

Derivative Financial Instruments and Hedging Activities

Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, currency, and interest rates on certain debt. These instruments are marked to fair value in the accompanying Consolidated Balance Sheets. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for hedge accounting are recognized immediately in net income. See Note 13 for additional information about hedges and derivative financial instruments.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This accounting standard supersedes all existing US GAAP revenue recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration which the company expects to collect in exchange for those goods or services. ASU 2014-09 will require additional disclosures in the notes to the consolidated financial statements.

Eaton adopted the standard at the start of the first quarter of 2018 using the modified retrospective approach and recorded a cumulative effect adjustment to retained earnings based on the current terms and conditions for open contracts as of January 1, 2018. The adoption of the standard did not have a material impact on the Company’s Consolidated financial statements. While, certain revenue streams moved from point-in-time or multiple elements to over time because of the continuous transfer of control to customers, we do not expect these changes to be material. The Company implemented the appropriate changes to business processes and controls to support recognition and disclosure under the new standard, including the new qualitative and quantitative disclosures that will include information on the nature, amount, timing and significant judgments impacting revenue from contracts with customers.

In October 2016, the FASB issued Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16). This accounting standard requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The previous accounting standard required companies to defer the income tax effects of intercompany transfers of assets by recording a prepaid tax, until such assets were sold to an outside party or otherwise recognized. ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017. Upon adoption, ASU 2016-16 requires companies to write off any income tax amounts that had been deferred as prepaid taxes from past intercompany transactions, and record deferred tax balances for amounts that have not been recognized, through a cumulative-effect adjustment to retained earnings. The Company adopted ASU 2016-16 at the start of the first quarter of 2018 by recording a cumulative-effect adjustment of approximately $200 to reduce retained earnings.

In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), (ASU 2016-02). This accounting standard requires that a lessee recognize a lease asset and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. ASU 2016-02 will require additional disclosures in the notes to the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2018. A project team has been formed to evaluate and implement the new standard. The project team is working to gather the data required to account for leases under the new standard, and validating the functionality of third-party lease accounting software. In addition, the Company is in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard. Eaton plans to adopt the standard as of the first quarter of 2019. Eaton is evaluating the impact of ASU 2016-02 and an estimate of the impact to the consolidated financial statements cannot be made at this time.


Note 2.	SALE AND ACQUISITIONS OF BUSINESSES

Sale of heavy-duty and medium-duty commercial vehicle automated transmission business

On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission business for $600 in cash to Cummins, Inc. The new joint venture is named Eaton Cummins Automated Transmission Technologies (ECATT). The Company recognized a pre-tax gain of $1,077, of which $533 related to the pre-tax gain from the $600 proceeds from the sale and $544 related to the Company’s remaining 50% investment in the joint venture being remeasured to fair value. The after-tax gain was $843. The fair value is based on the price paid to Eaton for the 50% interest sold to Cummins, Inc. and further supported by a discounted cash flow model. Eaton accounts for its investment on the equity method of accounting.

Acquisition of Ephesus Lighting, Inc.

On October 28, 2015, Eaton acquired Ephesus Lighting, Inc. (Ephesus). Ephesus is a leader in LED lighting for stadiums and other high lumen outdoor and industrial applications. Its sales for the 12 months ended September 30, 2015 were $23. Ephesus is reported within the Electrical Products business segment.

Acquisition of UK Safety Technology Manufacturer Oxalis Group Ltd.

On January 12, 2015, Eaton acquired Oxalis Group Ltd. (Oxalis). Oxalis is a manufacturer of closed-circuit television camera stations, public address and general alarm systems and other electrical products for the hazardous area, marine and industrial communications markets. Its sales for the 12 months ended December 31, 2014 were $9. Oxalis is reported within the Electrical Systems and Services business segment.


Note 3.	ACQUISITION INTEGRATION CHARGES

Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:



	2017		2016		2015
Electrical Products	$	4	$	3	$	25
Electrical Systems and Services	—		1		15
Hydraulics	—		—		2
Total business segments	4		4		42
Corporate	—		—		5
Total acquisition integration charges before income taxes	4		4		47
Income taxes	2		1		16
Total after income taxes	$	2	$	3	$	31
Per ordinary share - diluted	$	—	$	0.01	$	0.07

Business segment acquisition integration charges in 2017 related to the integration of Ephesus. The charges associated with Ephesus were included in Selling and administrative expense. Business segment acquisition integration charges in 2016 related to the integration of Ephesus and Oxalis. The charges associated with Ephesus were included in Cost of products sold and Selling and administrative expense, while the charges associated with Oxalis were included in Cost of products sold. Business segment acquisition charges in 2015 related primarily to the integration of Cooper Industries plc, which was acquired in 2012. The charges in 2015 were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment.

The integration of Cooper included costs related to restructuring activities Eaton undertook in an effort to gain efficiencies in selling, marketing, traditional back-office functions and manufacturing and distribution. These actions resulted in charges of $20 during 2015, comprised of severance costs and other expense totaling $1 and $19, respectively, of which $14 were incurred in the Electrical Products segment, and $6 were incurred in the Electrical Systems and Services segment.

Corporate integration charges related primarily to the acquisition of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.

See Note 15 for additional information about business segments.


Note 4.	RESTRUCTURING CHARGES

During 2015, Eaton announced its commitment to undertake actions to reduce its cost structure in all business segments and at corporate. Restructuring charges incurred under this plan were $116, $211, and $129 in 2017, 2016, and 2015, respectively. The multi-year initiative concluded at the end of 2017.

A summary of restructuring charges by type follows:



	2017		2016		2015
Workforce reductions	$	57	$	177	$	112
Plant closings and other costs	59		34		17
Total	$	116	$	211	$	129

A summary of restructuring charges by segment follows:



	2017		2016		2015
Electrical Products	$	29	$	44	$	12
Electrical Systems & Services	16		49		29
Hydraulics	32		67		31
Aerospace	2		4		5
Vehicle	12		35		34
Corporate	25		12		18
Total	$	116	$	211	$	129

A summary of liabilities related to workforce reductions, plant closings and other associated costs announced in 2015 follows:



	Workforce reductions			Plant closing and other			Total
Balance at December 31, 2015	$	54		$	—		$	54
Liability recognized	177			34			211
Payments	(116		)	(13		)	(129		)
Other adjustments	(2		)	(20		)	(22		)
Balance at December 31, 2016	113			1			114
Liability recognized	57			59			116
Payments	(102		)	(39		)	(141		)
Other adjustments	(1		)	(16		)	(17		)
Balance at December 31, 2017	$	67		$	5		$	72

These charges were included in Cost of products sold, Selling and administrative expenses or Other income-net, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 15 for additional information about business segments.


Note 5.	GOODWILL AND OTHER INTANGIBLE ASSETS

Changes in the carrying amount of goodwill by segment follow:



	Electrical Products			Electrical Systems and Services			Hydraulics			Aerospace			Vehicle			Total
December 31, 2015	$	6,642		$	4,279		$	1,259		$	956		$	343		$	13,479
Translation	(145		)	(76		)	(38		)	(18		)	(1		)	(278		)
December 31, 2016	6,497			4,203			1,221			938			342			13,201
Goodwill written off from sale of business	—			(3		)	—			—			(52		)	(55		)
Translation	262			111			36			9			4			422
December 31, 2017	$	6,759		$	4,311		$	1,257		$	947		$	294		$	13,568

A summary of other intangible assets follows:



	2017				2016
	Historical cost		Accumulated amortization		Historical cost		Accumulated amortization
Intangible assets not subject to amortization
Trademarks	$	1,654			$	1,637

Intangible assets subject to amortization
Customer relationships	$	3,586	$	1,475	$	3,456	$	1,199
Patents and technology	1,395		628		1,342		519
Trademarks	1,137		473		1,104		378
Other	99		30		97		26
Total intangible assets subject to amortization	$	6,217	$	2,606	$	5,999	$	2,122

Amortization expense related to intangible assets subject to amortization in 2017, and estimated amortization expense for each of the next five years, follows:



2017	$	383
2018	369
2019	362
2020	357
2021	346
2022	336


Note 6.	DEBT

A summary of long-term debt, including the current portion, follows:



	2017			2016
5.30% notes due 2017 ($150 converted to floating rate by interest rate swap)	$	—		$	250
6.10% debentures due 2017	—			289
1.50% senior notes due 2017 ($750 converted to floating rate by interest rate swap)	—			1,000
5.60% notes due 2018 ($415 converted to floating rate by interest rate swap)	450			450
4.215% Japanese yen notes due 2018	88			86
6.95% notes due 2019 ($300 converted to floating rate by interest rate swap)	300			300
3.875% debentures due 2020 ($150 converted to floating rate by interest rate swap)	239			239
3.47% notes due 2021 ($275 converted to floating rate by interest rate swap)	300			300
8.10% debentures due 2022 ($100 converted to floating rate by interest rate swap)	100			100
2.75% senior notes due 2022 ($1,400 converted to floating rate by interest rate swap)	1,600			1,600
3.68% notes due 2023 ($200 converted to floating rate by interest rate swap)	300			300
0.75% euro notes due 2024	659			580
6.50% debentures due 2025	145			145
3.10% senior notes due 2027	700			—
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap)	200			200
4.00% senior notes due 2032	700			700
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap)	136			136
5.80% notes due 2037	240			240
4.15% senior notes due 2042	1,000			1,000
3.92% senior notes due 2047	300			—
5.25% to 8.875% notes (maturities ranging from 2018 to 2035, including $50 converted to floating rate by interest rate swap)	239			239
Other	49			109
Total long-term debt	7,745			8,263
Less current portion of long-term debt	(578		)	(1,552		)
Long-term debt less current portion	$	7,167		$	6,711

Substantially all these long-term debt instruments are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries (the Senior Notes). Further, all of these long-term debt instruments except the 4.215% Japanese yen notes due 2018, the 3.875% debentures due 2020, the 3.47% notes due 2021, the 3.68% notes due 2023, and the 0.75% Euro notes due 2024 are registered by Eaton Corporation under the Securities Act of 1933, as amended (the Registered Senior Notes).

On November 17, 2017, Eaton refinanced a $500, four-year revolving credit facility with a $500, three-year revolving credit facility that will expire November 17, 2020 and also refinanced a $750, five-year revolving credit facility with a $750, five-year revolving credit facility that will expire November 17, 2022. Eaton also maintains a $750, five-year revolving credit facility that will expire October 14, 2021. These refinancings maintain long-term revolving credit facilities at a total of $2,000. The revolving credit facilities are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton's revolving credit facilities at December 31, 2017 or 2016. The Company had available lines of credit of $741 from various banks primarily for the issuance of letters of credit, of which there was $297 outstanding at December 31, 2017. Borrowings outside the United States are generally denominated in local currencies.

The Company repaid the 5.30% notes on March 15, 2017 for $250, the 6.10% debentures on June 29, 2017 for $289 and the 1.50% senior notes on November 2, 2017 for $1,000. The Company repaid the 2.375% debentures on January 15, 2016, for $240.

Short-term debt was $6 all of which was outside the United States as of December 31, 2017.

On September 15, 2017, a subsidiary of Eaton issued senior notes (the 2017 Senior Notes) with a face amount of $1,000. The 2017 Senior Notes are comprised of two tranches of $700 and $300, which mature in 2027 and 2047, respectively, with interest payable semi-annually at a respective rate of 3.1% and 3.9%. The issuer received proceeds totaling $993 from the issuance, net of financing costs. The 2017 Senior Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2017 Senior Notes contain customary optional redemption and par call provisions. The 2017 Senior Notes also contain a change of control provision which requires the Company to make an offer to purchase all or any part of the 2017 Senior Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees are amortized in Interest expense-net over the respective terms of the 2017 Senior Notes. The 2017 Senior Notes are subject to customary non-financial covenants.

On September 20, 2016, a subsidiary of Eaton issued euro denominated notes (Euro Notes) with a face value of €550 ($615 based on the September 20, 2016 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The Euro Notes mature in 2024 with interest payable annually at a rate of 0.75%. The issuer received proceeds totaling €544 ($609 based on the September 20, 2016 spot rate) from the issuance, net of financing costs and discounts. The senior Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The Euro Notes contain an optional redemption provision by which the Company may make an offer to purchase all or any part of the Euro Notes prior to June 20, 2024 at a purchase price of the greater of (a) 100% of the principal amount of the respective Euro Notes being redeemed, or (b) the sum of the present values of the respective remaining scheduled payments of principal and interest, discounted to the redemption date on an annual basis at the benchmark Bund Rate plus 20 basis points. In each case, the redemption price will include any accrued and unpaid interest on the Euro Notes being redeemed. At any time on or after June 20, 2024, the Company may redeem the Euro Notes, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed plus accrued and unpaid interest. The Euro Notes also contain a change of control provision which requires the Company to make an offer to purchase all or any part of the Euro Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees and discounts are amortized in Interest expense - net over the respective terms of the Euro Notes. The Euro Notes are subject to customary non-financial covenants.

Eaton is in compliance with each of its debt covenants for all periods presented.

Maturities of long-term debt for each of the next five years follow:



2018	$	578
2019	340
2020	241
2021	302
2022	1,701

Interest paid on debt follows:



2017	$	293
2016	266
2015	271


Note 7.	RETIREMENT BENEFITS PLANS

Eaton has defined benefits pension plans and other postretirement benefits plans.

Obligations and Funded Status



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2017			2016			2017			2016			2017			2016
Funded status
Fair value of plan assets	$	3,585		$	2,969		$	1,727		$	1,478		$	55		$	74
Benefit obligations	(3,961		)	(3,771		)	(2,399		)	(2,314		)	(448		)	(473		)
Funded status	$	(376	)	$	(802	)	$	(672	)	$	(836	)	$	(393	)	$	(399	)

Amounts recognized in the Consolidated Balance Sheets
Non-current assets	$	82		$	34		$	136		$	33		$	—		$	—
Current liabilities	(15		)	(24		)	(25		)	(22		)	(31		)	(31		)
Non-current liabilities	(443		)	(812		)	(783		)	(847		)	(362		)	(368		)
Total	$	(376	)	$	(802	)	$	(672	)	$	(836	)	$	(393	)	$	(399	)

Amounts recognized in Accumulated other comprehensive loss (pretax)
Net actuarial loss	$	1,059		$	1,232		$	596		$	771		$	19		$	21
Prior service cost (credit)	4			3			8			8			(46		)	(60		)
Total	$	1,063		$	1,235		$	604		$	779		$	(27	)	$	(39	)

Change in Benefit Obligations



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2017			2016			2017			2016			2017			2016
Balance at January 1	$	3,771		$	3,829		$	2,314		$	2,175		$	473		$	575
Service cost	96			111			71			63			3			4
Interest cost	123			125			55			62			14			17
Actuarial (gain) loss	271			52			(148		)	355			2			(72		)
Gross benefits paid	(301		)	(346		)	(97		)	(94		)	(74		)	(79		)
Currency translation	—			—			223			(245		)	3			1
Plan amendments	1			—			—			2			—			—
Other	—			—			(19		)	(4		)	27			27
Balance at December 31	$	3,961		$	3,771		$	2,399		$	2,314		$	448		$	473

Accumulated benefit obligation	$	3,802		$	3,620		$	2,283		$	2,189

Change in Plan Assets



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2017			2016			2017			2016			2017			2016
Balance at January 1	$	2,969		$	2,934		$	1,478		$	1,472		$	74		$	93
Actual return on plan assets	543			221			131			212			8			3
Employer contributions	374			160			99			102			20			30
Gross benefits paid	(301		)	(346		)	(97		)	(94		)	(74		)	(79		)
Currency translation	—			—			135			(211		)	—			—
Other	—			—			(19		)	(3		)	27			27
Balance at December 31	$	3,585		$	2,969		$	1,727		$	1,478		$	55		$	74

The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:



	United States pension liabilities				Non-United States pension liabilities
	2017		2016		2017		2016
Projected benefit obligation	$	3,540	$	3,342	$	966	$	1,902
Accumulated benefit obligation	3,380		3,190		911		1,824
Fair value of plan assets	3,081		2,505		175		1,066

Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss follow:



	United States pension liabilities						Non-United States pension liabilities						Other postretirement liabilities
	2017			2016			2017			2016			2017			2016
Balance at January 1	$	1,235		$	1,327		$	779		$	653		$	(39	)	$	21
Prior service cost arising during the year	1			—			—			2			—			—
Net loss (gain) arising during the year	(28		)	81			(185		)	235			(2		)	(69		)
Currency translation	—			—			66			(75		)	1			1
Less amounts included in expense during the year	(145		)	(173		)	(56		)	(36		)	13			8
Net change for the year	(172		)	(92		)	(175		)	126			12			(60		)
Balance at December 31	$	1,063		$	1,235		$	604		$	779		$	(27	)	$	(39	)

Benefits Expense



	United States pension benefit expense									Non-United States pension benefit expense									Other postretirement benefits expense
	2017			2016			2015			2017			2016			2015			2017			2016			2015
Service cost	$	96		$	111		$	123		$	71		$	63		$	71		$	3		$	4		$	6
Interest cost	123			125			156			55			62			72			14			17			24
Expected return on plan assets	(244		)	(250		)	(262		)	(94		)	(92		)	(99		)	(4		)	(6		)	(5		)
Amortization	83			92			119			51			33			40			(13		)	(9		)	2
	58			78			136			83			66			84			—			6			27
Settlements and special termination benefits	62			81			74			5			3			2			—			1			—
Total expense	$	120		$	159		$	210		$	88		$	69		$	86		$	—		$	7		$	27

The estimated pretax net amounts that will be recognized from Accumulated other comprehensive loss into net periodic benefit cost in 2018 follow:



	United States pension liabilities		Non-United States pension liabilities		Other postretirement liabilities
Actuarial loss	$	146	$	38	$	1
Prior service cost (credit)	1		1		(14		)
Total	$	147	$	39	$	(13	)

Retirement Benefits Plans Assumptions

In 2015, 2016 and 2017, for purposes of determining liabilities related to pension plans and other postretirement benefits plans in the United States, the Company used 2014 mortality tables and generational improvement scales that are based on MP-2015, MP-2016 and MP-2017, respectively.

In 2016, the Company adopted a change in the method it uses to estimate the service and interest cost components of net periodic benefit cost for its defined benefit pension and other postretirement benefit plans. Prior to 2016, for the vast majority of its plans, the service and interest cost components were estimated using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. Beginning in 2016, the Company used a spot rate approach by applying the specific spot rates along the yield curve to the relevant projected cash flows in the estimation of the service and interest components of benefit cost, resulting in a more precise measurement. This change does not affect the measurement of total benefit obligations. The change was accounted for as a change in estimate and, accordingly, was accounted for prospectively starting in 2016. The reductions in service cost and interest cost for 2016 associated with this change in estimate were $3 and $42, respectively.

Pension Plans



	United States pension plans						Non-United States pension plans
	2017		2016		2015		2017		2016		2015
Assumptions used to determine benefit obligation at year-end
Discount rate	3.64	%	4.12	%	4.22	%	2.62	%	2.63	%	3.46	%
Rate of compensation increase	3.15	%	3.15	%	3.18	%	3.11	%	3.13	%	3.12	%

Assumptions used to determine expense
Discount rate used to determine benefit obligation	4.12	%	4.22	%	3.97	%	2.63	%	3.46	%	3.33	%
Discount rate used to determine service cost	4.31	%	4.35	%	3.97	%	3.38	%	4.13	%	3.33	%
Discount rate used to determine interest cost	3.40	%	3.42	%	3.97	%	2.34	%	3.07	%	3.33	%
Expected long-term return on plan assets	7.90	%	8.50	%	8.50	%	6.30	%	6.62	%	6.92	%
Rate of compensation increase	3.15	%	3.18	%	3.16	%	3.13	%	3.12	%	3.13	%

The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The expected long-term rates of return on pension assets for United States pension plans and Non-United States pension plans for 2018 are 7.52% and 6.40%, respectively. The discount rates were determined using appropriate bond data for each country.


Level 1 -	Quoted prices (unadjusted) for identical assets in active markets.


Level 2 -	Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.


Level 3 -	Unobservable prices or inputs.

Other Postretirement Benefits Plans

A summary of the fair value of other postretirement benefits plan assets at December 31, 2017 and 2016, follows:



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2017
Cash equivalents	$	7	$	7	$	—	$	—
Common collective and other trusts measured at net asset value	48
Total other postretirement benefits plan assets	$	55	$	7	$	—	$	—



	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
2016
Cash equivalents	$	8	$	8	$	—	$	—
Common collective and other trusts measured at net asset value	66
Total other postretirement benefits plan assets	$	74	$	8	$	—	$	—

Valuation Methodologies

Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2017 and 2016.

Common collective and other trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. The investments in other trusts are predominantly in exchange traded funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. Common collective and other trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.

Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt securities is determined through third-party pricing models that consider various assumptions, including time value, yield curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.

United States treasuries - Valued at the closing price of each security.

Bank loans - These securities consist of senior secured term loans of publicly traded and privately held United States and non-United States floating rate obligations (principally corporations of non-investment grade rating). The fair value is determined through third-party pricing models that primarily utilize dealer quoted current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.

Equity securities - These securities consist of direct investments in the stock of publicly traded companies. Such investments are valued based on the closing price reported in an active market on which the individual securities are traded. As such, the direct investments are classified as Level 1.

Real estate - Consists of direct investments in the stock of publicly traded companies and investments in pooled funds that invest directly in real estate. The publicly traded companies are valued based on the closing price reported in an active market on which the individual securities are traded and as such are classified as Level 1. The pooled funds rely on appraisal based valuations and as such are classified as Level 3.

Cash equivalents - Primarily certificates of deposit, commercial paper, and repurchase agreements.

Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.

Hedge funds - Consists of direct investments in hedge funds through limited partnership interests. Net asset values are based on the estimated fair value of the ownership interest in the investment as determined by the General Partner. The majority of the holdings of the hedge funds are in equity securities traded on public exchanges. The investment terms of the hedge funds allow capital to be redeemed quarterly given prior notice with certain limitations. Hedge funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.

Money market funds - Money market funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.

Other - Primarily insurance contracts for international plans and also futures contracts and over-the-counter options. These investments are valued based on the closing prices of future contracts or indices as available on Bloomberg or similar service, and private equity investments.

For additional information regarding fair value measurements, see Note 12.

Defined Contribution Plans

The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The total contributions related to these plans are charged to expense and were as follows:



2017	$	114
2016	72
2015	137


Note 8.	COMMITMENTS AND CONTINGENCIES

Legal Contingencies

Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries, antitrust matters and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements. During the fourth quarter of 2016, the Company was able to resolve several insurance matters. In total, the income from insurance matters was $68.

In December 2011, Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) filed an action against (a) Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively, “Cooper”), (b) M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc. (collectively, “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust (the “Trust”) in Texas state court. Pepsi alleged that it was harmed by a 2011 settlement agreement (“2011 Settlement”) among Cooper, Mafco, and Pneumo Abex, LLC (“Pneumo,” which prior to the 2011 Settlement was a Mafco subsidiary), which settlement resolved litigation that Pneumo had previously brought against Cooper involving, among other things, a guaranty related to Pneumo’s friction products business. In November 2015, after a Texas court ruled that Pepsi's claims should be heard in arbitration, Pepsi filed a demand for arbitration against Cooper, Mafco, the Trust, and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts have opined, among other things, that the value contributed to the Trust for a release of the guaranty was approximately $440 below reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities may result in plaintiffs suing Pepsi under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts opine that Pepsi has no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations under the guaranty. The arbitration proceedings closed in December 2017. The parties are awaiting the issuance of a decision. The Company believes that the claims of Pepsi are without merit, and that the ultimate resolution of this matter will not have a material impact on the Company’s consolidated financial statements.

In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. The judgment was based on an alleged violation of an agency agreement between Raysul and Saturnia. At March 31, 2016, the Company had a total accrual of 100 Brazilian Reais related to this matter ($31 based on June 2016 exchange rates). In June 2016, Eaton signed a settlement agreement and resolved the matter, which did not have a material impact on the consolidated financial statements.

Environmental Contingencies

Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. The Company's manufacturing facilities are required to be certified to ISO 14001, an international standard for environmental management systems. The Company routinely reviews EHS performance at each of its facilities and continuously strives to improve pollution prevention.

Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party under the United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. At the end of 2017, the Company was involved with a total of 118 sites worldwide, including the Superfund sites mentioned above, with none of these sites being individually significant to the Company.

Remediation activities, generally involving soil and/or groundwater contamination, include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility study, design and action planning, performance (where actions may range from monitoring, to removal of contaminants, to installation of longer-term remediation systems), and operation and maintenance of a remediation system. The extent of expected remediation activities and costs varies by site. A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. Actual results may differ from these estimates. At December 31, 2017 and 2016, the Company had an accrual totaling $120 and $124, respectively, for these costs.

Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably possible to exceed the recorded liability by an amount that would have a material effect on its financial position, results of operations or cash flows.

Warranty Accruals

A summary of the current and long-term warranty accruals follows:



	2017			2016			2015
Balance at January 1	$	180		$	195		$	213
Provision	163			117			104
Settled	(156		)	(130		)	(114		)
Other	1			(2		)	(8		)
Balance at December 31	$	188		$	180		$	195

Lease Commitments

Eaton leases certain real properties and equipment. A summary of minimum rental commitments at December 31, 2017 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate, follow:



2018	$	159
2019	119
2020	85
2021	63
2022	42
Thereafter	71
Total noncancelable lease commitments	$	539

A summary of rental expense follows:



2017	$	222
2016	220
2015	225


Note 9.	INCOME TAXES

Certain amounts below have been adjusted to reflect the retrospective application of the Company's change in inventory accounting methods, as described in Notes 1 and 14.

Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable.



	Income (loss) before income taxes
	2017			2016			2015
Ireland	$	(1,090	)	$	(923	)	$	(608	)
Foreign	4,458			3,041			2,741
Total income before income taxes	$	3,368		$	2,118		$	2,133



	Income tax expense (benefit)
	2017			2016			2015
Current
Ireland	$	1		$	2		$	8
Foreign
United States	123			93			110
Non-United States	234			209			240
Total current income tax expense	358			304			358

Deferred
Ireland	—			2			1
Foreign
United States	82			(77		)	(76		)
Non-United States	(58		)	(30		)	(124		)
Total deferred income tax expense (benefit)	24			(105		)	(199		)
Total income tax expense	$	382		$	199		$	159

Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate follow:



	2017		2016		2015
Income taxes at the applicable statutory rate	25.0	%	25.0	%	25.0	%

Ireland operations
Ireland tax on trading income	—	%	(0.3	)%	(0.4	)%
Nondeductible interest expense	8.2	%	11.5	%	7.9	%

Foreign operations
United States operations (earnings taxed at other than the applicable statutory rate)	1.7	%	0.1	%	(0.6	)%
U.S. federal tax rate change	(7.5	)%	—	%	—	%
U.S. tax on foreign earnings	4.8	%	—	%	—	%
U.S. foreign tax credit	(3.9	)%	0.6	%	(0.8	)%
Credit for research activities	(0.5	)%	(0.8	)%	(0.8	)%
U.S. Other - net	3.2	%	2.5	%	5.4	%
Non-U.S. operations (earnings taxed at other than the applicable statutory tax rate)	(22.9	)%	(26.8	)%	(25.1	)%
Non-U.S. operations - other items	0.4	%	0.9	%	(0.5	)%

Worldwide operations
Adjustments to tax liabilities	(1.8	)%	(2.5	)%	(1.4	)%
Adjustments to valuation allowances	4.6	%	(0.8	)%	(1.2	)%
Effective income tax expense rate	11.3	%	9.4	%	7.5	%

During 2017, income tax expense of $382 was recognized (an effective tax rate of 11.3%) compared to income tax expense of $199 for 2016 (an effective tax rate of 9.4%) and income tax expense of $159 for 2015 (an effective tax rate of 7.5%). The 2017 effective tax rate includes tax expense of $234 on the gain related to the sale of business discussed in Note 2 and a tax benefit of $62 related to the U.S. Tax Cuts and Jobs Act (TCJA) which is discussed in further detail below. Excluding the gain and related tax impact on the sale of business, and the impact of the TCJA, the effective tax rate for 2017 was expense of 9.2%. The decrease from 9.4% for 2016 compared to 9.2% for 2017 was due to the resolution of tax contingencies in various tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of Accounting Standards Update 2016-09, Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The increase from 7.5% for 2015 compared to 9.4% for 2016 is primarily due to greater levels of income earned in higher tax jurisdictions, partially offset by net decreases in worldwide tax liabilities.

The U.S. Tax Cuts and Jobs Act was enacted on December 22, 2017. The TCJA reduces the U.S. federal corporate tax rate from 35% to 21% and requires a one-time transition tax on certain unremitted earnings of non-U.S. subsidiaries owned directly or indirectly by U.S. subsidiaries of the Company. For 2017, we have recorded a provisional tax benefit amount of $62 for the impact on our deferred tax balances and the one-time transition tax.

The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. Additionally, given the significant changes included in the TCJA, the Company re-evaluated the realizability of certain deferred tax assets, including foreign tax credits and interest deferral, and determined that valuation allowances needed to be adjusted. The Company is still analyzing certain aspects of the TCJA, including interpretations by state and local tax authorities, and additional Treasury guidance may be issued which could potentially affect the measurement of these balances or give rise to new deferred tax amounts. The Company recorded a provisional $79 tax benefit for the remeasurement of deferred tax balances and related valuation allowances.

The one-time transition tax is based on post-1986 unremitted earnings and profits (E&P) of non-U.S. subsidiaries owned directly or indirectly by U.S. subsidiaries of the Company which have been previously deferred from U.S. income taxes. The amount of the transition tax also depends on the amount of E&P held in cash or other specified assets. The Company recorded a provisional tax expense of $17 for the transition tax. This amount may change when Treasury issues additional guidance and the Company finalizes the calculation of E&P, including the amounts held in cash or other specified assets, and finalizes the calculation of available foreign tax credits.

No provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $22.1 billion at December 31, 2017, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.

The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. The cash that is permanently reinvested is typically used to expand operations either organically or through acquisitions. In addition, the Company expects that minimal to no Irish tax would apply to dividends paid to the Irish parent due to the impact of the Irish foreign tax credit system. The Company's public dividends and share repurchases are funded primarily from Non-U.S. operations.

Worldwide income tax payments, net of tax refunds, follow:



2017	$	288
2016	272
2015	302

Deferred Income Tax Assets and Liabilities

Components of noncurrent deferred income taxes follow:



	2017			2016
	Noncurrent assets and liabilities			Noncurrent assets and liabilities
Accruals and other adjustments
Employee benefits	$	430		$	761
Depreciation and amortization	(1,324		)	(1,823		)
Other accruals and adjustments	380			761
Ireland income tax loss carryforwards	1			1
Foreign income tax loss carryforwards	1,962			1,796
Foreign income tax credit carryforwards	404			277
Valuation allowance for income tax loss and income tax credit carryforwards	(1,992		)	(1,728		)
Other valuation allowances	(146		)	(41		)
Total deferred income taxes	$	(285	)	$	4

At December 31, 2017, Eaton Corporation plc and certain Irish subsidiaries had tax loss carryforwards that are available to reduce future taxable income and tax liabilities. These carryforwards and their respective expiration dates are summarized below:



	2018 through 2022		2023 through 2027		2028 through 2032		2033 through 2037		Not subject to expiration		Valuation allowance
Ireland income tax loss carryforwards	$	—	$	—	$	—	$	—	$	8	$	—
Ireland deferred income tax assets for income tax loss carryforwards	—		—		—		—		1		(1		)

At December 31, 2017, the Company's foreign subsidiaries, including all U.S. and non-U.S. subsidiaries, had income tax loss carryforwards and income tax credit carryforwards that are available to reduce future taxable income or tax liabilities. These carryforwards and their respective expiration dates are summarized below:



	2018 through 2022		2023 through 2027		2028 through 2032		2033 through 2037		Not subject to expiration		Valuation allowance
Foreign income tax loss carryforwards	$	918	$	7,528	$	14	$	545	$	4,047	$	—
Foreign deferred income tax assets for income tax loss carryforwards	112		721		14		175		1,047		(1,830		)
Foreign deferred income tax assets for income tax loss carryforwards after ASU 2013-11	101		715		14		86		1,047		(1,830		)
Foreign income tax credit carryforwards	86		205		78		115		64		(161		)
Foreign income tax credit carryforwards after ASU 2013-11	82		168		27		94		33		(161		)

Recoverability of Deferred Income Tax Assets

Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards.

Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance.

Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.

Unrecognized Income Tax Benefits

A summary of gross unrecognized income tax benefits follows:



	2017			2016			2015
Balance at January 1	$	629		$	584		$	493
Increases and decreases as a result of positions taken during prior years
Transfers from valuation allowances	—			—			—
Other increases, including currency translation	10			21			34
Other decreases, including currency translation	(30		)	(24		)	(34		)
Balances related to acquired businesses	—			—			(1		)
Increases as a result of positions taken during the current year	162			90			109
Decreases relating to settlements with tax authorities	(10		)	(19		)	—
Decreases as a result of a lapse of the applicable statute of limitations	(26		)	(23		)	(17		)
Balance at December 31	$	735		$	629		$	584

Eaton's long-term policy has been to enter into tax planning strategies only if it is more likely than not that the benefit would be sustained upon audit. For example, the Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4.

If all unrecognized tax benefits were recognized, the net impact on the provision for income tax expense would be $652.

As of December 31, 2017 and 2016, Eaton had accrued approximately $80 and $94, respectively, for the payment of worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. The Company has accrued penalties in jurisdictions primarily where they are automatically applied to any deficiency, regardless of the merit of the position.

As part of Eaton’s broader efforts to streamline operations, accelerate organic growth, and increase administrative efficiencies, the Company centralized certain activities and assets, which resulted in an increase in current income taxes payable, prepaid tax, and unrecognized tax benefits for 2017. These changes did not impact the Company’s 2017 effective tax rate.

The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as the prospect of retroactive regulations; new case law; and the willingness of the income tax authority to settle the issue, including the timing thereof. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change.

Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. With only few exceptions, Irish and non-United States subsidiaries of Eaton are no longer subject to examinations for years before 2007.

The United States Internal Revenue Service (“IRS”) has completed its examination of Eaton Corporation and Includible Subsidiaries’ (Eaton Corp.) United States income tax returns for 2005 through 2010 and has issued Statutory Notices of Deficiency (Notices) as discussed below. The statute of limitations on these tax years remains open until the matters are resolved. The IRS is currently examining tax years 2011 through 2013. The statute of limitations for tax years 2011 through 2013 is open until August 31, 2018. Tax years 2014 through 2016 are still subject to examination by the IRS.

Eaton is also under examination for the income tax filings in various states and localities of the United States. With only a few exceptions, Eaton Corp. is no longer subject to income tax examinations from states and localities within the United States for years before 2012. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized. Some states and localities may not limit their assessment to the United States federal adjustments, and may require the opening of the entire tax year. In addition, with only a few exceptions, BZ Holdings Inc. and Includible Subsidiaries (the former U.S. holding company for Cooper Industries) are no longer subject to United States state and local income tax examinations for years before 2012.

In 2011, the IRS issued a Notice for Eaton Corp. for the 2005 and 2006 tax years (the 2011 Notice). The 2011 Notice proposed assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S.. Eaton Corp. has set its transfer prices for products sold between these affiliates at the same prices that Eaton Corp. sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton Corp. entered into with the IRS that governed the 2005-2010 tax years. The Company has continued to apply the arms-length transfer pricing methodology for 2011 through the current reporting period. Immediately prior to the 2011 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. Eaton Corp. contested the proposed assessments in United States Tax Court. The case involved both whether the APAs should be enforced and, if not, the appropriate transfer pricing methodology. On July 26, 2017, the United States Tax Court issued a ruling in which it agreed with Eaton Corp. that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements.

In 2014, Eaton Corp. received a Notice from the IRS for the 2007 through 2010 tax years (the 2014 Notice) proposing assessments of $190 in additional taxes plus $72 in penalties, net of agreed credits and deductions, which the company has also contested in Tax Court. The proposed assessments pertain primarily to the same transfer pricing issues and APA for which the Tax Court has issued its ruling during 2017 as noted above. The Company believes that the Tax Court’s ruling for tax years 2005-2006 will also be applicable to the 2007-2010 years. Following the issuance of the Tax Court’s ruling, Eaton and the IRS recognized that the ruling on the enforceability of the APAs did not address a secondary issue regarding the transfer pricing for a certain royalty paid from 2006-2010. Eaton Corp. reported a consistent royalty rate for 2006-2010. The IRS has agreed to the royalty rate as reported by Eaton Corp. in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to apply the same royalty rate in the 2007-2010 years.

The 2014 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton Corp.’s controlled foreign corporations. The Company believes that the proposed assessment is without merit. Eaton and the IRS have both moved for partial summary judgment on this issue. The Tax Court heard oral arguments on the motions in January 2018, following which the Court ordered further briefing.

During 2010, the Company received a tax assessment of $49 (translated at the December 31, 2017 exchange rate), plus interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. The Company is contesting the assessment, which is under review at the administrative appeals level. During 2013, the Brazilian tax authorities began an audit of tax years 2009 through 2012. During 2014, the Company received a tax assessment of $37 (translated at the December 31, 2017 exchange rate), plus interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues concerning the 2005 through 2008 tax years), which the Company is also contesting and is under review at the administrative appeals level. Multiple outside advisors have stated that Brazilian tax authorities are raising the issue for most clients with similar facts and that the matter is expected to require at least 10 years to resolve. The Company continues to believe that final resolution of the assessments will not have a material impact on its consolidated financial statements.


Note 10.	EATON SHAREHOLDERS' EQUITY

There are 750 million Eaton ordinary shares authorized ($0.01 par value per share), 439.9 million and 449.4 million of which were issued and outstanding at December 31, 2017 and 2016, respectively. Eaton's Memorandum and Articles of Association authorized 40 thousand deferred ordinary shares (€1.00 par value per share) and 10 thousand preferred A shares ($1.00 par value per share), all of which were issued and outstanding at December 31, 2017 and 2016, and 10 million serial preferred shares ($0.01 par value per share), none of which is outstanding at December 31, 2017 and 2016. At December 31, 2017, there were 13,089 holders of record of Eaton ordinary shares. Additionally, 20,138 current and former employees were shareholders through participation in the Eaton Savings Plan, Eaton Personal Investment Plan, or the Eaton Puerto Rico Retirement Savings Plan.

On October 22, 2013, Eaton's Board of Directors adopted a share repurchase program (the 2013 Program). Under the 2013 Program, the ordinary shares were expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During 2016 and 2015, 1.5 million and 11.3 million ordinary shares were repurchased under the 2013 Program in the open market at a total cost of $82 and $682, respectively. On February 24, 2016, the Board of Directors approved a new share repurchase program for share repurchases up to $2,500 of ordinary shares (2016 Program). Under the 2016 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 2017 and 2016, 11.5 million and 10.3 million shares, respectively, were purchased on the open market under the 2016 Program for a total cost of $850 and $648, respectively.

Eaton has deferral plans that permit certain employees and directors to defer a portion of their compensation. A trust contains $11 and $13 of ordinary shares and marketable securities at December 31, 2017 and 2016, respectively, to fund a portion of these liabilities. The marketable securities were included in Other assets and the ordinary shares were included in Shareholders' equity at historical cost.

On February 28, 2018, Eaton's Board of Directors declared a quarterly dividend of $0.66 per ordinary share, a 10% increase over the dividend paid in the fourth quarter of 2017. The dividend is payable on March 23, 2018, to shareholders of record at the close of business on March 12, 2018.

Comprehensive Income (Loss)

Comprehensive income (loss) consists primarily of net income, currency translation and related hedging instruments, changes in unrecognized costs of pension and other postretirement benefits, and changes in the effective portion of open derivative contracts designated as cash flow hedges. The following table summarizes the pre-tax and after-tax amounts recognized in Comprehensive income (loss):



	2017						2016						2015
	Pre-tax			After-tax			Pre-tax			After-tax			Pre-tax			After-tax
Currency translation and related hedging instruments	$	800		$	807		$	(562	)	$	(570	)	$	(1,080	)	$	(1,078	)

Pensions and other postretirement benefits
Prior service credit (cost) arising during the year	(1		)	—			(2		)	(2		)	1			1
Net gain (loss) arising during the year	215			169			(247		)	(197		)	(123		)	(89		)
Currency translation	(67		)	(53		)	74			62			62			46
Other	—			(5		)	—			(2		)	—			(3		)
Amortization of actuarial loss and prior service cost reclassified to earnings	188			130			201			133			237			156
	335			241			26			(6		)	177			111

Cash flow hedges
Gain (loss) on derivatives designated as cash flow hedges	(24		)	(15		)	(21		)	(14		)	20			13
Changes in cash flow hedges reclassified to earnings	17			11			8			5			(16		)	(10		)
Cash flow hedges, net of reclassification adjustments	(7		)	(4		)	(13		)	(9		)	4			3
Other comprehensive income (loss) attributable to Eaton ordinary shareholders	$	1,128		$	1,044		$	(549	)	$	(585	)	$	(899	)	$	(964	)

The changes in Accumulated other comprehensive loss follow:



	Currency translation and related hedging instruments			Pensions and other postretirement benefits			Cash flow hedges			Total
Balance at December 31, 2016	$	(3,062	)	$	(1,380	)	$	(6	)	$	(4,448	)
Other comprehensive income (loss) before reclassifications	807			111			(15		)	903
Amounts reclassified from Accumulated other comprehensive loss (income)	—			130			11			141
Net current-period Other comprehensive income (loss)	807			241			(4		)	1,044
Balance at December 31, 2017	$	(2,255	)	$	(1,139	)	$	(10	)	$	(3,404	)

The reclassifications out of Accumulated other comprehensive loss follow:



	December 31, 2017			Consolidated Statements of Income classification
Amortization of defined benefit pension and other postretirement benefits items
Actuarial loss and prior service cost	$	(188	)	1
Tax benefit	58
Total, net of tax	(130		)

Gains and (losses) on cash flow hedges
Currency exchange contracts	(17		)	Cost of products sold
Tax benefit	6
Total, net of tax	(11		)

Total reclassifications for the period	$	(141	)

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 defined benefit 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 follows:



(Shares in millions)	2017		2016*		2015*
Net income attributable to Eaton ordinary shareholders	$	2,985	$	1,916	$	1,972

Weighted-average number of ordinary shares outstanding - diluted	447.0		456.5		467.1
Less dilutive effect of equity-based compensation	2.5		1.5		1.6
Weighted-average number of ordinary shares outstanding - basic	444.5		455.0		465.5

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	6.68	$	4.20	$	4.22
Basic	6.71		4.21		4.23

*Certain amounts have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Notes 1 and 14.

In 2017, 2016, and 2015, 0.4 million, 1.7 million, and 1.6 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.


Note 11.	EQUITY-BASED COMPENSATION

Restricted Stock Units and Awards

Restricted stock units (RSUs) and restricted stock awards (RSAs) have been issued to certain employees and directors. Participants awarded RSUs in 2015 and 2016 do not receive dividends; therefore, the fair value is determined by reducing the closing market price of the Company’s ordinary shares on the date of grant by the present value of the estimated dividends had they been paid. The fair value of RSUs awarded in 2017 and RSAs are determined based on the closing market price of the Company’s ordinary shares at the date of grant. The RSUs entitle the holder to receive one ordinary share for each RSU upon vesting, generally over three years. RSAs are issued and outstanding at the time of grant, but remain subject to forfeiture until vested, generally over three or four years. A summary of the RSU and RSA activity for 2017 follows:



(Restricted stock units and awards in millions)	Number of restricted stock units and awards		Weighted-average fair value per unit and award
Non-vested at January 1	2.6		$	57.87
Granted	0.9		72.09
Vested	(0.9	)	61.80
Forfeited	(0.2	)	61.66
Non-vested at December 31	2.4		$	62.24

Information related to RSUs and RSAs follows:



	2017		2016		2015
Pretax expense for RSUs and RSAs	$	66	$	65	$	68
After-tax expense for RSUs and RSAs	43		42		44
Fair value of vested RSUs and RSAs	73		71		110

As of December 31, 2017, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $79, and the weighted-average period in which the expense is expected to be recognized is 2.3 years. Excess tax benefit for RSUs and RSAs totaled $2 for 2017. There was no excess tax benefit for RSUs and RSAs in 2016 and 2015.

Performance Share Units

In February 2017 and 2016, the Compensation and Organization Committee of the Board of Directors approved the grant of performance share units (PSUs) to certain employees that vest based on the satisfaction of a three-year service period and total shareholder return relative to that of a group of peers. Awards earned at the end of the three-year vesting period range from 0% to 200% of the targeted number of PSUs granted based on the ranking of total shareholder return of the Company, assuming reinvestment of all dividends, relative to a defined peer group of companies. Equity-based compensation expense for these PSUs is recognized over the period during which an employee is required to provide service in exchange for the award. Upon vesting, dividends that have accumulated during the vesting period are paid on earned awards.

The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions. The principal assumptions utilized in valuing these PSUs include the expected stock price volatility (based on the most recent 3-year period as of the grant date) and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon bonds with a 3-year maturity as of the grant date). A summary of the assumptions used in determining fair value of these PSUs follows:



	2017			2016
Expected volatility	24		%	24		%
Risk-free interest rate	1.46		%	0.88		%
Weighted-average fair value of PSUs granted	$	80.07		$	76.41

A summary of the 2017 activity for these PSUs follows:



(Performance share units in millions)	Number of performance share units		Weighted-average fair value per unit
Non-vested at January 1	0.5		$	76.41
Granted1	0.4		80.07
Vested	—		—
Forfeited	(0.1	)	77.90
Non-vested at December 31	0.8		$	77.97

1 Performance shares granted assuming the Company will perform at target relative to peers.

In February 2015 and 2016, performance share units were granted to certain employees that entitles the holder to receive one ordinary share for each PSU that vest based on the satisfaction of a three-year service period and the achievement of certain performance metrics over that same period. Upon vesting, PSU holders receive dividends that accumulate during the vesting period. The fair value of these PSUs is determined based on the closing market price of the Company's ordinary shares at the date of grant. Equity-based compensation expense is recognized over the period an employee is required to provide service based on the number of PSUs for which achievement of the performance objectives is probable. A summary of the 2017 activity for these PSUs follows:



(Performance share units in millions)	Number of performance share units		Weighted-average fair value per unit
Non-vested at January 1	0.7		$	68.23
Granted	—		—
Vested	(0.1	)	71.72
Forfeited	(0.5	)	71.72
Non-vested at December 31	0.1		$	56.55

Information related to PSUs follows:



	2017		2016		2015
Pretax expense for PSUs	$	22	$	13	$	2
After-tax expense for PSUs	13		8		1

As of December 31, 2017, total compensation expense not yet recognized related to non-vested PSUs was $30 and the weighted average period in which the expense is to be recognized is 1.6 years. There was no excess tax benefit for PSUs in 2017, 2016 and 2015.

Stock Options

Under various plans, stock options have been granted to certain employees and directors to purchase ordinary shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or director is required to provide service.

The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of stock options follows:



	2017			2016			2015
Expected volatility	27		%	27		%	29		%
Expected option life in years	6.6			5.5			5.5
Expected dividend yield	2.8		%	2.5		%	2.6		%
Risk-free interest rate	1.8 to 2.1%			1.2 to 1.5%			1.6 to 1.5%
Weighted-average fair value of stock options granted	$	15.11		$	11.80		$	15.25

A summary of stock option activity follows:



(Options in millions)	Weighted-average exercise price per option		Options		Weighted-average remaining contractual life in years	Aggregate intrinsic value
Outstanding at January 1, 2017	$	56.75	5.5
Granted	71.89		0.7
Exercised	46.31		(1.5	)
Forfeited and canceled	59.23		(0.1	)
Outstanding at December 31, 2017	$	62.43	4.6		6.3	$	77.3

Exercisable at December 31, 2017	$	61.06	2.9		5.1	$	52.1
Reserved for future grants at December 31, 2017			15.0

The aggregate intrinsic value in the table above represents the total excess of the $79.01 closing price of Eaton ordinary shares on the last trading day of 2017 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's ordinary shares.

Information related to stock options follows:



	2017		2016		2015
Pretax expense for stock options	$	11	$	14	$	12
After-tax expense for stock options	8		9		8
Proceeds from stock options exercised	66		74		52
Income tax benefit related to stock options exercised
Tax benefit classified in operating activities in the Consolidated Statements of Cash Flows	13		5		4
Excess tax benefit classified in financing activities in the Consolidated Statements of Cash Flows	—		1		1
Intrinsic value of stock options exercised	41		42		44
Total fair value of stock options vested	$	11	$	14	$	12

Stock options exercised, in millions of options	1.5		1.9		1.4

As of December 31, 2017, total compensation expense not yet recognized related to non-vested stock options was $8.8, and the weighted-average period in which the expense is expected to be recognized is 1.7 years.


Note 12.	FAIR VALUE MEASUREMENTS

Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:



	Total			Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)			Unobservable inputs (Level 3)
2017
Cash	$	561		$	561	$	—		$	—
Short-term investments	534			534		—			—
Net derivative contracts	36			—		36			—

2016
Cash	$	543		$	543	$	—		$	—
Short-term investments	203			203		—			—
Net derivative contracts	(3		)	—		(3		)	—

Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were measured using unobservable inputs.

Other Fair Value Measurements

Long-term debt and the current portion of long-term debt had a carrying value of $7,745 and fair value of $8,048 at December 31, 2017 compared to $8,263 and $8,477, respectively, at December 31, 2016. The fair value of Eaton's debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.

As discussed in Note 2, on July 31, 2017 Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission business to Cummins, Inc. Eaton's remaining 50% interest was remeasured to a fair value of $600 on July 31, 2017 using a discounted cash flow model which is considered a Level 3 fair value measurement. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. Eaton will account for its investment on the equity method of accounting.

Short-Term Investments

Eaton invests excess cash generated from operations in short-term marketable investments. For those investments classified as “available-for-sale”, Eaton marks these investments to fair value with the offset recognized in Accumulated other comprehensive loss. A summary of the carrying value of short-term investments follows:



	2017		2016
Time deposits, certificates of deposit and demand deposits with banks	$	435	$	149
Money market investments	99		54
Total short-term investments	$	534	$	203


Note 13.	DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.

Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:

•

Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.

•

Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive loss and reclassified to income in the same period when the gain or loss on the hedged item is included in income.

•

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

The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income. The cash flows resulting from these financial instruments are classified in operating activities on the Consolidated Statements of Cash Flows.

For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. During 2017 and 2016, Eaton recognized gains of $2 and $7, respectively, associated with these commodity hedge contracts. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.

Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments on an after-tax basis was $88 and $86 at December 31, 2017 and 2016, respectively, and designated on a pre-tax basis was $652 and $572 at December 31, 2017 and 2016, respectively. See Note 6 for additional information about debt.

Interest Rate Risk

Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk of certain long-term debt. These interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt in Note 6. Eaton also entered into several forward starting floating-to-fixed interest rate swaps to manage interest rate risk in anticipation of debt that was refinanced in 2017.

A summary of interest rate swaps outstanding at December 31, 2017, follows:

Fixed-to-Floating Interest Rate Swaps



Notional amount		Fixed interest rate received	Floating interest rate paid	Basis for contracted floating interest rate paid
$	415	5.60%	4.59%	6 month LIBOR + 3.18%
300		6.95%	6.31%	3 month LIBOR + 5.07%
25		8.88%	5.24%	6 month LIBOR + 3.84%
150		3.88%	3.22%	1 month LIBOR + 2.12%
275		3.47%	2.84%	1 month LIBOR + 1.74%
100		8.10%	7.08%	1 month LIBOR + 5.90%
1,400		2.75%	1.66%	1 month LIBOR + 0.58%
200		3.68%	2.17%	1 month LIBOR + 1.07%
25		7.63%	3.87%	6 month LIBOR + 2.48%
50		7.65%	3.98%	6 month LIBOR + 2.57%
25		5.45%	1.68%	6 month LIBOR + 0.28%

Derivative Financial Statement Impacts

The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets follows:



	Notional amount		Other current assets		Other noncurrent assets		Other current liabilities		Other noncurrent liabilities		Type of hedge	Term
December 31, 2017
Derivatives designated as hedges
Fixed-to-floating interest rate swaps	$	2,965	$	1	$	41	$	—	$	17	Fair value	6 months to 17 years
Currency exchange contracts	924		7		7		22		2		Cash flow	1 to 36 months
Total			$	8	$	48	$	22	$	19

Derivatives not designated as hedges
Currency exchange contracts	$	3,719	$	39			$	19				1 to 12 months
Commodity contracts	13		1				—					1 to 12 months
Total			$	40			$	19



December 31, 2016
Derivatives designated as hedges
Fixed-to-floating interest rate swaps	$	3,765	$	1	$	65	$	—	$	8	Fair value	3 months to 18 years
Forward starting floating-to-fixed interest rate swaps	450		—		19		—		1		Cash flow	11 years
Currency exchange contracts	802		11		1		22		17		Cash flow	1 to 36 months
Total			$	12	$	85	$	22	$	26

Derivatives not designated as hedges
Currency exchange contracts	$	5,333	$	31			$	85				1 to 12 months
Commodity contracts	10		2				—					1 to 12 months
Total			$	33			$	85

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

The impact of derivative instruments to the Consolidated Statements of Income and Comprehensive Income follow:



	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
	2017			2016				2017			2016
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	(15	)	$	18		Interest expense - net	$	—		$	—
Interest rate locks	(9		)	—			Interest expense - net	—			—
Currency exchange contracts	—			(39		)	Cost of products sold	(17		)	(8		)
Total	$	(24	)	$	(21	)		$	(17	)	$	(8	)

Amounts recognized in net income follow:



	2017			2016
Derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps	$	(33	)	$	(36	)
Related long-term debt converted to floating interest rates by interest rate swaps	33			36
	$	—		$	—

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


Note 14.	ACCOUNTS RECEIVABLE AND INVENTORY

Accounts Receivable

Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its accounts receivable based on the length of time the receivable is past due and any anticipated future write-off based on historic experience. Accounts receivable balances are written off against an allowance for doubtful accounts after a final determination of uncollectability has been made. Accounts receivable are net of an allowance for doubtful accounts of $57 and $50 at December 31, 2017 and 2016.

Inventory

Inventory is carried at lower of cost or net realizable value. During the fourth quarter of 2017, the Company changed its method of accounting for certain inventory in the United States from the LIFO method to the FIFO method. The FIFO method of accounting for inventory is preferable because it conforms the Company's entire inventory to a single method of accounting and improves comparability with the Company's peers. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and costs of the distribution network.

The components of inventory follow:



	2017		2016 As adjusted
Raw materials	$	953	$	879
Work-in-process	471		395
Finished goods	1,196		1,072
Total inventory	$	2,620	$	2,346

All prior periods presented in the financial statements have been retrospectively adjusted to apply the new method of FIFO accounting for certain U.S. inventory. The cumulative effect of this change on periods prior to those presented herein resulted in an increase in Retained earnings of $70 as of January 1, 2015. The Tax Cuts and Jobs Act ("TCJA"), which was signed into law on December 22, 2017, would have required $14 of additional tax expense to adjust the deferred tax asset related to the LIFO reserve to the new tax rate if inventories continued to be computed under the LIFO method. The change from the LIFO method to the FIFO method eliminated the need to record this $14 of additional tax expense.

As a result of the retrospective application of this change in accounting method, the following financial statement line items within the accompanying financial statements were adjusted, as follows:



		December 31, 2017										December 31, 2016							December 31, 2015
(In millions except for per share data)		As computed under LIFO		As reported under FIFO		Effect of change						As originally reported		As adjusted		Effect of change			As originally reported		As adjusted		Effect of change
		TCJA		Other
Consolidated Statements of Income
	Cost of products sold	$	13,770	$	13,756	$	—		$	(14	)	$	13,400	$	13,409	$	9		$	14,292	$	14,304	$	12
	Income before income taxes	3,354		3,368		—			14			2,127		2,118		(9		)	2,145		2,133		(12		)
	Income tax expense	391		382		(14		)	5			202		199		(3		)	164		159		(5		)
	Net income	2,963		2,986		14			9			1,925		1,919		(6		)	1,981		1,974		(7		)
	Net income attributable to Eaton ordinary shareholders	$	2,962	$	2,985	$	14		$	9		$	1,922	$	1,916	$	(6	)	$	1,979	$	1,972	$	(7	)

Net income per ordinary share
	Diluted	$	6.63	$	6.68	$	0.03		$	0.02		$	4.21	$	4.20	$	(0.01	)	$	4.23	$	4.22	$	(0.01	)
	Basic	$	6.66	$	6.71	$	0.03		$	0.02		$	4.22	$	4.21	$	(0.01	)	$	4.25	$	4.23	$	(0.02	)

Consolidated Statements of Comprehensive Income
	Net income	$	2,963	$	2,986	$	14		$	9		$	1,925	$	1,919	$	(6	)	$	1,981	$	1,974	$	(7	)
	Net income attributable to Eaton ordinary shareholders	2,962		2,985		14			9			1,922		1,916		(6		)	1,979		1,972		(7		)
	Total comprehensive income attributable to Eaton ordinary shareholders	$	4,006	$	4,029	$	14		$	9		$	1,337	$	1,331	$	(6	)	$	1,015	$	1,008	$	(7	)



		December 31, 2017									December 31, 2016									December 31, 2015
(In millions except for per share data)		As computed under LIFO			As reported under FIFO			Effect of change			As originally reported			As adjusted			Effect of change			As originally reported			As adjusted			Effect of change
Consolidated Balance Sheets
	Inventory	$	2,514		$	2,620		$	106		$	2,254		$	2,346		$	92
	Deferred income taxes - noncurrent asset	253			253			—			360			325			(35		)
	Deferred income taxes - noncurrent liability	512			538			26			321			321			—
	Retained earnings	$	8,589		$	8,669		$	80		$	7,498		$	7,555		$	57

Consolidated Statements of Cash Flows
	Net income	$	2,963		$	2,986		$	23		$	1,925		$	1,919		$	(6	)	$	1,981		$	1,974		$	(7	)
	Deferred income taxes	(197		)	(206		)	(9		)	(80		)	(83		)	(3		)	(100		)	(105		)	(5		)
	Inventory	$	(188	)	$	(202	)	$	(14	)	$	25		$	34		$	9		$	(20	)	$	(8	)	$	12

As a result of the retrospective application of this change in accounting principle, the following financial statement line items within the unaudited interim 2017 and 2016 quarterly condensed consolidated financial statements were adjusted, as follows:



	(unaudited)	Three months ended
		March 30, 2017							June 30, 2017							September 30, 2017
(In millions except for per share data)		As originally reported		As adjusted		Effect of change			As originally reported		As adjusted		Effect of change			As originally reported		As adjusted		Effect of change
Consolidated Statements of Income
	Cost of products sold	$	3,310	$	3,307	$	(3	)	$	3,450	$	3,448	$	(2	)	$	3,469	$	3,466	$	(3	)
	Income before income taxes	464		467		3			570		572		2			1,691		1,694		3
	Income tax expense	32		33		1			54		55		1			292		293		1
	Net income	432		434		2			516		517		1			1,399		1,401		2
	Net income attributable to Eaton ordinary shareholders	$	432	$	434	$	2		$	515	$	516	$	1		$	1,399	$	1,401	$	2

Net income per ordinary share
	Diluted	$	0.96	$	0.96	$	—		$	1.15	$	1.15	$	—		$	3.14	$	3.14	$	—
	Basic	$	0.96	$	0.97	$	0.01		$	1.15	$	1.16	$	0.01		$	3.16	$	3.16	$	—



	(unaudited)	Three months ended
		March 30, 2016							June 30, 2016							September 30, 2016
(In millions except for per share data)		As originally reported		As adjusted		Effect of change			As originally reported		As adjusted		Effect of change			As originally reported		As adjusted		Effect of change
Consolidated Statements of Income
	Cost of products sold	$	3,291	$	3,294	$	3		$	3,419	$	3,422	$	3		$	3,371	$	3,374	$	3
	Income before income taxes	442		439		(3		)	553		550		(3		)	573		570		(3		)
	Income tax expense	39		38		(1		)	61		60		(1		)	51		50		(1		)
	Net income	403		401		(2		)	492		490		(2		)	522		520		(2		)
	Net income attributable to Eaton ordinary shareholders	$	404	$	402	$	(2	)	$	491	$	489	$	(2	)	$	523	$	521	$	(2	)

Net income per ordinary share
	Diluted	$	0.88	$	0.87	$	(0.01	)	$	1.07	$	1.07	$	—		$	1.15	$	1.14	$	(0.01	)
	Basic	$	0.88	$	0.88	$	—		$	1.08	$	1.07	$	(0.01	)	$	1.15	$	1.15	$	—


Note 15.	BUSINESS SEGMENT AND GEOGRAPHIC REGION INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton’s segments are as follows:

Electrical Products and Electrical Systems and Services

The Electrical Products segment consists of electrical components, industrial components, residential products, single phase power quality, emergency lighting, fire detection, wiring devices, structural support systems, circuit protection, and lighting products. The Electrical Systems and Services segment consists of power distribution and assemblies, three phase power quality, hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation, utility power distribution, power reliability equipment, and services. The principal markets for these segments are industrial, institutional, governmental, utility, commercial, residential and information technology. These products are used wherever there is a demand for electrical power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories, utilities, and industrial and energy facilities. The segments share several common global customers, but a large number of customers are located regionally. Sales are made directly to original equipment manufacturers, utilities, and certain other end users, as well as through distributors, resellers, and manufacturers' representatives.

Hydraulics

The Hydraulics segment is a global leader in hydraulics components, systems and services for industrial and mobile equipment. Eaton offers a wide range of power products including pumps, motors and hydraulic power units; a broad range of controls and sensing products including valves, cylinders and electronic controls; a full range of fluid conveyance products including industrial and hydraulic hose, fittings, and assemblies, thermoplastic hose and tubing, couplings, connectors, and assembly equipment; filtration systems solutions; industrial drum and disc brakes; and golf grips. The principal markets for the Hydraulics segment include renewable energy, marine, agriculture, oil and gas, construction, mining, forestry, utility, material handling, truck and bus, machine tools, molding, primary metals, and power generation. Key manufacturing customers in these markets and other customers are located globally. Products are sold and serviced through a variety of channels.

Aerospace

The Aerospace segment is a leading global supplier of aerospace fuel, hydraulics, and pneumatic systems for commercial and military use. Products include hydraulic power generation systems for aerospace applications including pumps, motors, hydraulic power units, hose and fittings, electro-hydraulic pumps; controls and sensing products including valves, cylinders, electronic controls, electromechanical actuators, sensors, aircraft flap and slat systems and nose wheel steering systems; fluid conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing and ducting; and fuel systems including fuel pumps, sensors, valves, adapters and regulators. The principal markets for the Aerospace segment are manufacturers of commercial and military aircraft and related after-market customers. These manufacturers and other customers operate globally. Products are sold and serviced through a variety of channels.

Vehicle

The Vehicle segment is a leader in the design, manufacture, marketing, and supply of: drivetrain, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks and commercial vehicles. Products include transmissions, clutches, hybrid power systems, superchargers, engine valves and valve actuation systems, cylinder heads, locking and limited slip differentials, transmission controls, fuel vapor components, fluid connectors and conveyance products for the global vehicle industry. The principal markets for the Vehicle segment are original equipment manufacturers and aftermarket customers of heavy-, medium-, and light-duty trucks, SUVs, CUVs, passenger cars and agricultural equipment.

Other Information

No single customer represented greater than 10% of net sales in 2017, 2016 or 2015, respectively.

The accounting policies of the business segments are generally the same as the policies described in Note 1, except that operating profit only reflects the service cost component related to pensions and other postretirement benefits. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties. These intersegment sales are eliminated in consolidation. Operating profit includes the operating profit from intersegment sales.

For purposes of business segment performance measurement, the Company does not allocate items that are of a non-operating nature or are of a corporate or functional governance nature. Corporate expenses consist of transaction costs associated with the acquisition of certain businesses and corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs. Identifiable assets of the business segments exclude goodwill, other intangible assets, and general corporate assets, which principally consist of certain cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.

Business Segment Information



	2017			2016			2015
Net sales
Electrical Products	$	7,193		$	6,957		$	6,976
Electrical Systems and Services	5,666			5,662			5,931
Hydraulics	2,468			2,222			2,459
Aerospace	1,744			1,753			1,807
Vehicle	3,333			3,153			3,682
Total net sales	$	20,404		$	19,747		$	20,855

Segment operating profit
Electrical Products	$	1,287		$	1,240		$	1,156
Electrical Systems and Services	770			711			776
Hydraulics	288			198			246
Aerospace	332			335			310
Vehicle	537			474			645
Total segment operating profit	3,214			2,958			3,133

Corporate
Amortization of intangible assets	(388		)	(392		)	(406		)
Interest expense - net	(246		)	(233		)	(232		)
Pension and other postretirement benefits expense	(45		)	(60		)	(130		)
Gain on sale of business	1,077			—			—
Other corporate expense - net*	(244		)	(155		)	(232		)
Income before income taxes*	3,368			2,118			2,133
Income tax expense*	382			199			159
Net income*	2,986			1,919			1,974
Less net income for noncontrolling interests	(1		)	(3		)	(2		)
Net income attributable to Eaton ordinary shareholders*	$	2,985		$	1,916		$	1,972

*Other corporate expense - net and Income tax expense in 2016 and 2015 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14.

Business segment operating profit was reduced by acquisition integration charges as follows:



	2017		2016		2015
Electrical Products	$	4	$	3	$	25
Electrical Systems and Services	—		1		15
Hydraulics	—		—		2
Total	$	4	$	4	$	42

Corporate acquisition integration charges totaled $5 in 2015, and are included above in Other corporate expense - net. There was no corporate acquisition integration charges in 2017 and 2016. See Note 3 for additional information about acquisition integration charges.



	2017		2016		2015
Identifiable assets
Electrical Products	$	2,570	$	2,363	$	2,538
Electrical Systems and Services	2,141		2,222		2,285
Hydraulics	1,345		1,188		1,138
Aerospace	938		830		841
Vehicle	2,379		1,549		1,579
Total identifiable assets	9,373		8,152		8,381
Goodwill	13,568		13,201		13,479
Other intangible assets	5,265		5,514		6,014
Corporate*	4,417		3,609		3,185
Total assets*	$	32,623	$	30,476	$	31,059
*Corporate identifiable assets in 2016 and 2015 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14.

Capital expenditures for property, plant and equipment
Electrical Products	$	134	$	134	$	137
Electrical Systems and Services	83		78		94
Hydraulics	96		92		61
Aerospace	37		28		33
Vehicle	141		142		119
Total	491		474		444
Corporate	29		23		62
Total expenditures for property, plant and equipment	$	520	$	497	$	506

Depreciation of property, plant and equipment
Electrical Products	$	143	$	141	$	137
Electrical Systems and Services	83		82		82
Hydraulics	61		64		67
Aerospace	26		27		28
Vehicle	109		109		113
Total	422		423		427
Corporate	54		63		52
Total depreciation of property, plant and equipment	$	476	$	486	$	479

Geographic Region Information

Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and equipment - net.



	2017		2016		2015
Net sales
United States	$	11,222	$	10,937	$	11,396
Canada	942		898		969
Latin America	1,485		1,448		1,726
Europe	4,394		4,228		4,379
Asia Pacific	2,361		2,236		2,385
Total	$	20,404	$	19,747	$	20,855

Long-lived assets
United States	$	1,872	$	1,924	$	1,982
Canada	20		19		19
Latin America	290		281		243
Europe	769		681		734
Asia Pacific	551		538		587
Total	$	3,502	$	3,443	$	3,565


Note 16.	CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The Registered Senior Notes issued by Eaton Corporation are registered under the Securities Act of 1933. Eaton and certain other of Eaton's 100% owned direct and indirect subsidiaries (the Guarantors) fully and unconditionally guaranteed (subject, in the case of the Guarantors, other than Eaton, to customary release provisions as described below), on a joint and several basis, the Registered Senior Notes. The following condensed consolidating financial statements are included so that separate financial statements of Eaton, Eaton Corporation and each of the Guarantors are not required to be filed with the Securities and Exchange Commission. The consolidating adjustments primarily relate to eliminations of investments in subsidiaries and intercompany balances and transactions. The condensed consolidating financial statements present investments in subsidiaries using the equity method of accounting. See Note 6 for additional information related to the Registered Senior Notes.

The guarantee of a Guarantor that is not a parent of the issuer will be automatically and unconditionally released and discharged in the event of any sale of the Guarantor or of all or substantially all of its assets, or in connection with the release or termination of the Guarantor as a guarantor under all other U.S. debt securities or U.S. syndicated credit facilities, subject to limitations set forth in the indenture. The guarantee of a Guarantor that is a direct or indirect parent of the issuer will only be automatically and unconditionally released and discharged in connection with the release or termination of such Guarantor as a guarantor under all other debt securities or syndicated credit facilities (in both cases, U.S. or otherwise), subject to limitations set forth in the indenture.

During 2017, 2016 and 2015, the Company undertook certain steps to restructure ownership of various subsidiaries. The transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. This restructuring has been reflected as of the beginning of the earliest period presented below.

Additionally, certain amounts in 2016 and 2015 have been adjusted to reflect the change in inventory accounting method, as described in Notes 1 and 14.

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2017

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	6,659		$	6,563		$	12,599		$	(5,417	)	$	20,404

Cost of products sold	—			5,276			4,840			9,054			(5,414		)	13,756
Selling and administrative expense	136			1,172			759			1,498			—			3,565
Research and development expense	—			215			207			162			—			584
Interest expense (income) - net	—			245			21			(21		)	1			246
Gain on sale of business	—			560			—			517			—			1,077
Other expense (income) - net	79			9			(70		)	(56		)	—			(38		)
Equity in loss (earnings) of subsidiaries, net of tax	(3,644		)	(1,139		)	(4,958		)	(4,665		)	14,406			—
Intercompany expense (income) - net	444			(561		)	1,197			(1,080		)	—			—
Income (loss) before income taxes	2,985			2,002			4,567			8,224			(14,410		)	3,368
Income tax expense (benefit)	—			499			(232		)	115			—			382
Net income (loss)	2,985			1,503			4,799			8,109			(14,410		)	2,986
Less net loss (income) for noncontrolling interests	—			—			—			(3		)	2			(1		)
Net income (loss) attributable to Eaton ordinary shareholders	$	2,985		$	1,503		$	4,799		$	8,106		$	(14,408	)	$	2,985

Other comprehensive income (loss)	1,044			41			1,064			2,192			(3,297		)	1,044
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	4,029		$	1,544		$	5,863		$	10,298		$	(17,705	)	$	4,029

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2016

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	6,447		$	6,351		$	11,961		$	(5,012	)	$	19,747

Cost of products sold	—			5,076			4,697			8,649			(5,013		)	13,409
Selling and administrative expense	140			1,153			760			1,452			—			3,505
Research and development expense	—			235			186			168			—			589
Interest expense (income) - net	—			233			17			(16		)	(1		)	233
Other expense (income) - net	(35		)	(48		)	43			(67		)	—			(107		)
Equity in loss (earnings) of subsidiaries, net of tax	(2,433		)	(770		)	(3,266		)	(2,808		)	9,277			—
Intercompany expense (income) - net	412			(122		)	1,230			(1,520		)	—			—
Income (loss) before income taxes	1,916			690			2,684			6,103			(9,275		)	2,118
Income tax expense (benefit)	—			23			26			149			1			199
Net income (loss)	1,916			667			2,658			5,954			(9,276		)	1,919
Less net loss (income) for noncontrolling interests	—			—			—			(5		)	2			(3		)
Net income (loss) attributable to Eaton ordinary shareholders	$	1,916		$	667		$	2,658		$	5,949		$	(9,274	)	$	1,916

Other comprehensive income (loss)	(585		)	54			(566		)	(1,344		)	1,856			(585		)
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	1,331		$	721		$	2,092		$	4,605		$	(7,418	)	$	1,331

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME YEAR ENDED DECEMBER 31, 2015

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	6,926		$	6,660		$	12,531		$	(5,262	)	$	20,855

Cost of products sold	—			5,518			5,041			8,978			(5,233		)	14,304
Selling and administrative expense	141			1,223			738			1,494			—			3,596
Research and development expense	—			266			197			162			—			625
Interest expense (income) - net	—			222			21			(13		)	2			232
Other expense (income) - net	—			—			24			(59		)	—			(35		)
Equity in loss (earnings) of subsidiaries, net of tax	(2,449		)	(821		)	(3,221		)	(2,761		)	9,252			—
Intercompany expense (income) - net	336			(384		)	1,218			(1,170		)	—			—
Income (loss) before income taxes	1,972			902			2,642			5,900			(9,283		)	2,133
Income tax expense (benefit)	—			87			(69		)	152			(11		)	159
Net income (loss)	1,972			815			2,711			5,748			(9,272		)	1,974
Less net loss (income) for noncontrolling interests	—			—			—			(3		)	1			(2		)
Net income (loss) attributable to Eaton ordinary shareholders	$	1,972		$	815		$	2,711		$	5,745		$	(9,271	)	$	1,972

Other comprehensive income (loss)	(964		)	5			(951		)	(2,000		)	2,946			(964		)
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	1,008		$	820		$	1,760		$	3,745		$	(6,325	)	$	1,008

CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2017

	Eaton Corporation plc		Eaton Corporation		Guarantors		Other subsidiaries		Consolidating adjustments			Total
Assets
Current assets
Cash	$	—	$	183	$	12	$	366	$	—		$	561
Short-term investments	—		—		—		534		—			534
Accounts receivable - net	—		482		1,317		2,144		—			3,943
Intercompany accounts receivable	8		2,865		5,146		2,741		(10,760		)	—
Inventory	—		473		692		1,537		(82		)	2,620
Prepaid expenses and other current assets	—		229		145		277		28			679
Total current assets	8		4,232		7,312		7,599		(10,814		)	8,337

Property, plant and equipment - net	—		835		684		1,983		—			3,502

Other noncurrent assets
Goodwill	—		1,307		6,293		5,968		—			13,568
Other intangible assets	—		138		3,002		2,125		—			5,265
Deferred income taxes	—		356		—		221		(324		)	253
Investment in subsidiaries	15,045		15,439		87,919		39,527		(157,930		)	—
Intercompany loans receivable	3,122		7,104		2,735		61,225		(74,186		)	—
Other assets	—		748		163		787		—			1,698
Total assets	$	18,175	$	30,159	$	108,108	$	119,435	$	(243,254	)	$	32,623

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	—	$	—	$	—	$	6	$	—		$	6
Current portion of long-term debt	—		542		35		1		—			578
Accounts payable	—		533		313		1,320		—			2,166
Intercompany accounts payable	4		4,920		4,405		1,431		(10,760		)	—
Accrued compensation	—		128		63		262		—			453
Other current liabilities	1		564		308		1,000		(1		)	1,872
Total current liabilities	5		6,687		5,124		4,020		(10,761		)	5,075

Noncurrent liabilities
Long-term debt	—		6,180		976		8		3			7,167
Pension liabilities	—		341		83		802		—			1,226
Other postretirement benefits liabilities	—		192		94		76		—			362
Deferred income taxes	—		—		558		304		(324		)	538
Intercompany loans payable	917		3,718		68,405		1,146		(74,186		)	—
Other noncurrent liabilities	—		314		272		379		—			965
Total noncurrent liabilities	917		10,745		70,388		2,715		(74,507		)	10,258

Shareholders’ equity
Eaton shareholders’ equity	17,253		12,727		32,596		112,663		(157,986		)	17,253
Noncontrolling interests	—		—		—		37		—			37
Total equity	17,253		12,727		32,596		112,700		(157,986		)	17,290
Total liabilities and equity	$	18,175	$	30,159	$	108,108	$	119,435	$	(243,254	)	$	32,623

CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2016

	Eaton Corporation plc		Eaton Corporation		Guarantors		Other subsidiaries		Consolidating adjustments			Total
Assets
Current assets
Cash	$	1	$	92	$	5	$	445	$	—		$	543
Short-term investments	—		—		—		203		—			203
Accounts receivable - net	—		536		1,049		1,975		—			3,560
Intercompany accounts receivable	5		953		4,239		3,382		(8,579		)	—
Inventory	—		443		638		1,344		(79		)	2,346
Prepaid expenses and other current assets	—		77		42		237		25			381
Total current assets	6		2,101		5,973		7,586		(8,633		)	7,033

Property, plant and equipment - net	—		857		706		1,880		—			3,443

Other noncurrent assets
Goodwill	—		1,362		6,293		5,546		—			13,201
Other intangible assets	—		169		3,442		1,903		—			5,514
Deferred income taxes	—		864		15		218		(772		)	325
Investment in subsidiaries	32,852		20,200		92,766		44,345		(190,163		)	—
Intercompany loans receivable	—		7,609		2,061		56,938		(66,608		)	—
Other assets	—		490		134		336		—			960
Total assets	$	32,858	$	33,652	$	111,390	$	118,752	$	(266,176	)	$	30,476

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	—	$	—	$	8	$	6	$	—		$	14
Current portion of long-term debt	—		1,250		296		6		—			1,552
Accounts payable	1		412		252		1,053		—			1,718
Intercompany accounts payable	281		3,332		3,130		1,836		(8,579		)	—
Accrued compensation	—		98		58		223		—			379
Other current liabilities	1		590		276		957		(2		)	1,822
Total current liabilities	283		5,682		4,020		4,081		(8,581		)	5,485

Noncurrent liabilities
Long-term debt	—		5,767		936		8		—			6,711
Pension liabilities	—		610		161		888		—			1,659
Other postretirement benefits liabilities	—		198		99		71		—			368
Deferred income taxes	—		—		732		361		(772		)	321
Intercompany loans payable	17,621		3,768		44,788		431		(66,608		)	—
Other noncurrent liabilities	—		326		212		396		—			934
Total noncurrent liabilities	17,621		10,669		46,928		2,155		(67,380		)	9,993

Shareholders’ equity
Eaton shareholders’ equity	14,954		17,301		60,442		112,478		(190,221		)	14,954
Noncontrolling interests	—		—		—		38		6			44
Total equity	14,954		17,301		60,442		112,516		(190,215		)	14,998
Total liabilities and equity	$	32,858	$	33,652	$	111,390	$	118,752	$	(266,176	)	$	30,476

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS DECEMBER 31, 2017

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net cash provided by (used in) operating activities	$	258		$	(498	)	$	(30	)	$	4,545		$	(1,609	)	$	2,666

Investing activities
Capital expenditures for property, plant and equipment	—			(90		)	(110		)	(320		)	—			(520		)
Cash received from sales (paid for acquisitions) of affiliates	—			—			(92		)	92			—			—
Purchases of short-term investments - net	—			—			—			(298		)	—			(298		)
Investments in affiliates	(190		)	—			—			(90		)	280			—
Return of investments in affiliates	—			—			90			—			(90		)	—
Loans to affiliates	—			(444		)	—			(6,723		)	7,167			—
Repayments of loans from affiliates	—			303			46			3,817			(4,166		)	—
Proceeds from sale of business	—			338			—			269			—			607
Other - net	—			(45		)	9			30			—			(6		)
Net cash provided by (used in) investing activities	(190		)	62			(57		)	(3,223		)	3,191			(217		)

Financing activities
Proceeds from borrowings	—			1,000			—			—			—			1,000
Payments on borrowings	—			(1,250		)	(297		)	(7		)	—			(1,554		)
Proceeds from borrowings from affiliates	2,605			3,130			991			441			(7,167		)	—
Payments on borrowings from affiliates	(822		)	(2,904		)	(353		)	(87		)	4,166			—
Capital contributions from affiliates	—			—			90			190			(280		)	—
Return of capital to affiliates	—			—			—			(90		)	90			—
Other intercompany financing activities	—			573			469			(1,042		)	—			—
Cash dividends paid	(1,068		)	—			—			—			—			(1,068		)
Cash dividends paid to affiliates	—			—			(800		)	(809		)	1,609			—
Exercise of employee stock options	66			—			—			—			—			66
Repurchase of shares	(850		)	—			—			—			—			(850		)
Employee taxes paid from shares withheld	—			(14		)	(5		)	(3		)	—			(22		)
Other - net	—			(8		)	(1		)	(5		)	—			(14		)
Net cash provided by (used in) financing activities	(69		)	527			94			(1,412		)	(1,582		)	(2,442		)

Effect of currency on cash	—			—			—			11			—			11
Total increase (decrease) in cash	(1		)	91			7			(79		)	—			18
Cash at the beginning of the period	1			92			5			445			—			543
Cash at the end of the period	$	—		$	183		$	12		$	366		$	—		$	561

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS DECEMBER 31, 2016

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net cash provided by (used in) operating activities	$	(253	)	$	22		$	(232	)	$	3,033		$	—		$	2,570

Investing activities
Capital expenditures for property, plant and equipment	—			(92		)	(114		)	(291		)	—			(497		)
Cash received from acquisitions of businesses, net of cash acquired	—			—			1			—			—			1
Sales (purchases) of short-term investments - net	—			—			2			(42		)	—			(40		)
Investments in affiliates	(1,250		)	—			(120		)	(1,370		)	2,740			—
Return of investments in affiliates	—			—			47			—			(47		)	—
Loans to affiliates	—			(251		)	(655		)	(8,208		)	9,114			—
Repayments of loans from affiliates	—			1,293			—			5,951			(7,244		)	—
Other - net	—			(9		)	41			(25		)	—			7
Net cash provided by (used in) investing activities	(1,250		)	941			(798		)	(3,985		)	4,563			(529		)

Financing activities
Proceeds from borrowings	—			21			610			—			—			631
Payments on borrowings	—			(408		)	(233		)	(12		)	—			(653		)
Proceeds from borrowings from affiliates	3,843			4,045			1,120			106			(9,114		)	—
Payments on borrowings from affiliates	(646		)	(4,712		)	(1,844		)	(42		)	7,244			—
Capital contribution from affiliates	—			—			1,370			1,370			(2,740		)	—
Return of capital to affiliates	—			—			—			(47		)	47			—
Other intercompany financing activities	—			168			12			(180		)	—			—
Cash dividends paid	(1,037		)	—			—			—			—			(1,037		)
Exercise of employee stock options	74			—			—			—			—			74
Repurchase of shares	(730		)	—			—			—			—			(730		)
Employee taxes paid from shares withheld	—			(12		)	(3		)	(3		)	—			(18		)
Other - net	—			1			(4		)	(2		)	—			(5		)
Net cash provided by (used in) financing activities	1,504			(897		)	1,028			1,190			(4,563		)	(1,738		)

Effect of currency on cash	—			—			—			(28		)	—			(28		)
Total increase (decrease) in cash	1			66			(2		)	210			—			275
Cash at the beginning of the period	—			26			7			235			—			268
Cash at the end of the period	$	1		$	92		$	5		$	445		$	—		$	543

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS DECEMBER 31, 2015

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net cash provided by (used in) operating activities	$	(137	)	$	(195	)	$	(281	)	$	3,026		$	(4	)	$	2,409

Investing activities
Capital expenditures for property, plant and equipment	—			(94		)	(146		)	(266		)	—			(506		)
Cash paid for acquisitions of businesses, net of cash acquired	—			—			(36		)	(36		)	—			(72		)
Sales (purchases) of short-term investments - net	—			—			(2		)	39			—			37
Investments in affiliates	(1,482		)	—			(1,176		)	(1,482		)	4,140			—
Loans to affiliates	—			(889		)	(39		)	(10,608		)	11,536			—
Repayments of loans from affiliates	—			342			359			7,493			(8,194		)	—
Proceeds from the sales of businesses	—			—			—			1			—			1
Other - net	—			(50		)	47			(32		)	—			(35		)
Net cash provided by (used in) investing activities	(1,482		)	(691		)	(993		)	(4,891		)	7,482			(575		)

Financing activities
Proceeds from borrowings	—			408			—			17			—			425
Payments on borrowings	—			(724		)	(301		)	(2		)	—			(1,027		)
Proceeds from borrowings from affiliates	3,322			6,885			997			332			(11,536		)	—
Payments on borrowings from affiliates	(48		)	(6,467		)	(1,282		)	(397		)	8,194			—
Capital contribution from affiliates	—			1,176			1,482			1,482			(4,140		)	—
Other intercompany financing activities	—			(518		)	378			140			—			—
Cash dividends paid	(1,026		)	—			—			—			—			(1,026		)
Cash dividends paid to affiliates	—			—			—			(4		)	4			—
Exercise of employee stock options	52			—			—			—			—			52
Repurchase of shares	(682		)	—			—			—			—			(682		)
Employee taxes paid from shares withheld	—			(26		)	(6		)	(6		)	—			(38		)
Other - net	—			1			—			(10		)	—			(9		)
Net cash provided by (used in) financing activities	1,618			735			1,268			1,552			(7,478		)	(2,305		)

Effect of currency on cash	—			—			—			(42		)	—			(42		)
Total increase (decrease) in cash	(1		)	(151		)	(6		)	(355		)	—			(513		)
Cash at the beginning of the period	1			177			13			590			—			781
Cash at the end of the period	$	—		$	26		$	7		$	235		$	—		$	268

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

Summary of Results of Operations

During 2017, the Company's results of operations returned to solid growth as global end markets expanded, particularly in the second half of 2017. During the year, the Company completed its multi-year restructuring program that reduced its cost structure, which expanded operating margins.

On July 31, 2017, Eaton sold a 50% interest in its heavy-duty and medium-duty commercial vehicle automated transmission business for $600 in cash to Cummins, Inc. The Company recognized a pre-tax gain of $1,077, of which $533 related to the pre-tax gain from the $600 proceeds from the sale and $544 related to the Company’s remaining 50% investment in the joint venture being remeasured to fair value. The after-tax gain was $843. Eaton accounts for its investment on the equity method of accounting.

The tax rate for 2017 includes a tax benefit of $62 related to the United States Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017. The tax benefit of $62 related to the TCJA is comprised of a tax benefit of $79 for adjusting deferred tax assets and liabilities, offset by a tax expense of $17 for the taxation of unremitted earnings of non-U.S. subsidiaries owned directly or indirectly by U.S. subsidiaries of Eaton.

During 2016, the Company's results of operations were impacted by a decline in several of the Company's end markets. Further, the results of operations were negatively impacted by the strengthening in the value of the U.S. dollar. Despite the declining market conditions and unfavorable impact of currency translation, the Company generated solid operating margins and diluted net income per share.

During 2015, Eaton announced a multi-year restructuring initiative to reduce its cost structure and gain efficiencies in all business segments and at corporate in order to respond to declining market conditions. Restructuring charges in 2017, 2016 and 2015 were $116, $211 and $129, respectively. These charges were primarily comprised of severance costs. The initiative concluded at the end of 2017 and the projected annualized savings from these restructuring actions are expected to be $518, when fully realized in 2018.

Additional information related to acquisitions and divestitures of businesses, and restructuring activities is presented in Note 2, Note 3, and Note 4, respectively, of the Notes to the Consolidated Financial Statements.

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 follows:



	2017		2016*		2015*
Net sales	$	20,404	$	19,747	$	20,855
Net income attributable to Eaton ordinary shareholders	2,985		1,916		1,972
Net income per share attributable to Eaton ordinary shareholders - diluted	$	6.68	$	4.20	$	4.22

Years ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include adjusted earnings, adjusted earnings per ordinary share, and operating profit before acquisition integration charges for each business segment as well as corporate, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the table below. Operating profit before acquisition integration charges is reconciled in the discussion of the operating results of each business segment, and excludes acquisition integration expense related to integration of Ephesus Lighting, Inc. in 2017 and 2016, Oxalis Group Ltd. in 2016, and primarily Cooper Industries plc in 2015. 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 and each business segment. For additional information on acquisition integration charges, see Note 3 to the Consolidated Financial Statements.

Consolidated Financial Results



	2017			Change from 2016		2016*			Change from 2015		2015*
Net sales	$	20,404		3	%	$	19,747		(5	)%	$	20,855
Gross profit	6,648			5	%	6,338			(3	)%	6,551
Percent of net sales	32.6		%			32.1		%			31.4		%
Income before income taxes	3,368			59	%	2,118			(1	)%	2,133
Net income	2,986			56	%	1,919			(3	)%	1,974
Less net income for noncontrolling interests	(1		)			(3		)			(2		)
Net income attributable to Eaton ordinary shareholders	2,985			56	%	1,916			(3	)%	1,972
Excluding acquisition integration charges, after-tax (Note 3)	2					3					31
Adjusted earnings	$	2,987		56	%	$	1,919		(4	)%	$	2,003

Net income per share attributable to Eaton ordinary shareholders - diluted	$	6.68		59	%	$	4.20		—	%	$	4.22
Excluding per share impact of acquisition integration charges, after-tax (Note 3)	—					0.01					0.07
Adjusted earnings per ordinary share	$	6.68		59	%	$	4.21		(2	)%	$	4.29

Year ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

Net Sales

Net sales in 2017 increased by 3% compared to 2016 due to an increase of 3% in organic sales. The increase in organic sales in 2017 was primarily due to higher sales volumes in the Electrical Products, Hydraulics, and Vehicle business segments. Net sales in 2016 decreased by 5% compared to 2015 due to a decrease of 4% in organic sales and decrease of 1% from the impact of negative currency translation. The decrease in organic sales in 2016 was primarily due to weakening demand in several of the Company's end markets.

Gross Profit

Gross profit margin increased from 32.1% in 2016 to 32.6% in 2017. The increase in gross profit margin in 2017 was primarily due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by commodity inflation. Gross profit increased from 31.4% in 2015 to 32.1% in 2016. The increase in gross profit margin in 2016 was primarily due to savings from restructuring actions and other cost control measures, partially offset by lower sales volumes, unfavorable product mix, and higher restructuring charges.

Income Taxes

During 2017, an income tax expense of $382 was recognized (an effective tax rate of 11.3%) compared to income tax expense of $199 in 2016 (an effective tax rate of 9.4%). The 2017 effective tax rate includes tax expense of $234 on the gain from the sale of the business discussed in Note 2, and a tax benefit of $62 related to the TCJA. Excluding the gain and related tax impact on the sale of business, and the impact of the TCJA, the tax rate for 2017 was expense of 9.2%. The decrease from 9.4% for the full year 2016 compared to 9.2% for the full year 2017 was due to the resolution of tax contingencies in various tax jurisdictions and the excess tax benefits recognized for employee share-based payments pursuant to the adoption of ASU 2016-09 as discussed in Note 1. During 2016, an income tax expense of $199 was recognized (an effective tax rate of 9.4%) compared to income tax expense of $159 in 2015 (an effective tax rate of 7.5%). The 2016 effective tax rate increased from 2015 primarily due to greater levels of income earned in higher tax jurisdictions, partially offset by net decreases in worldwide tax liabilities.

Net Income

Net income attributable to Eaton ordinary shareholders of $2,985 in 2017 increased 56% compared to $1,916 in 2016. Net income in 2017 included $843 from the gain on the sale of the business discussed in Note 2, and $62 of income from the new U.S. tax bill discussed in Note 9. Excluding these items, the increase in 2017 was primarily due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by commodity inflation. Net income attributable to Eaton ordinary shareholders of $1,916 in 2016 decreased 3% compared to Net income attributable to Eaton ordinary shareholders of $1,972 in 2015. The decrease in 2016 was primarily due to lower sales volumes, unfavorable product mix, and higher restructuring charges, partially offset by savings from restructuring actions, other cost control measures, a decrease in pension and other post benefits expense, and income from several insurance matters during 2016.

Net income per ordinary share in 2017 included $1.89 from the gain on the sale of business discussed in Note 2 and $0.14 income from the new U.S. tax bill discussed in Note 9. Net income per ordinary share increased by 59% to $6.68 in 2017 compared to $4.20 in 2016. The increase was due to higher Net income attributable to Eaton ordinary shareholders and the Company's share repurchases in 2017. Net income per ordinary share was broadly flat at $4.20 in 2016 compared to $4.22 in 2015 primarily due to a decrease in Net Income attributable to Eaton ordinary shareholders offset by the impact of the Company's share repurchases in 2016.

Adjusted Earnings

Adjusted earnings of $2,987 in 2017 increased 56% compared to Adjusted earnings of $1,919 in 2016. The increase was due to higher Net income attributable to Eaton ordinary shareholders. Adjusted earnings of $1,919 in 2016 decreased 4% compared to 2015 Adjusted earnings of $2,003. The decrease was due to lower Net income attributable to Eaton ordinary shareholders and lower acquisition integration charges.

Adjusted earnings per ordinary share increased by 59% to $6.68 in 2017 compared to $4.21 in 2016. The increase in Adjusted earnings per ordinary share in 2017 was due to higher Adjusted earnings and the Company's share repurchases in 2017. Adjusted earnings per ordinary share of $4.21 in 2016 decreased 2% from $4.29 in 2015. The decrease in Adjusted earnings per ordinary share in 2016 was due to lower Adjusted earnings, partially offset by the impact of the Company's share repurchases in 2016.

Business Segment Results of Operations

The following is a discussion of Net sales, operating profit and operating profit margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquisition integration charges see Note 3 to the Consolidated Financial Statements.

Electrical Products



	2017			Change from 2016		2016			Change from 2015		2015
Net sales	$	7,193		3	%	$	6,957		—	%	$	6,976

Operating profit	$	1,287		4	%	$	1,240		7	%	$	1,156
Operating margin	17.9		%			17.8		%			16.6		%

Acquisition integration charges	$	4				$	3				$	25

Before acquisition integration charges
Operating profit	$	1,291		4	%	$	1,243		5	%	$	1,181
Operating margin	17.9		%			17.9		%			16.9		%

Net sales increased 3% in 2017 compared to 2016 due to an increase of 3% in organic sales. Organic sales growth in 2017 was driven by growth in the Americas and Europe. Net sales were broadly flat in 2016 compared to 2015 due to an increase of 1% in organic sales, offset by a decrease of 1% from the impact of negative currency translation. By region, organic sales grew in 2016 in the Americas and Europe, while organic sales declined in Asia Pacific.

Operating margin increased from 17.8% in 2016 to 17.9% in 2017. The increase in operating margin in 2017 was primarily due to higher sales volumes, savings from restructuring actions, and lower restructuring charges, partially offset by commodity inflation and the impact from natural disasters in 2017. Operating margin increased from 16.6% in 2015 to 17.8% in 2016. The increase in operating margin in 2016 was primarily due to savings from restructuring actions, other cost control measures, and lower acquisition integration charges, partially offset by higher restructuring charges and unfavorable product mix.

Operating margin before acquisition integration charges was flat at 17.9% for 2016 and 2017. Operating margin before acquisition integration charges increased from 16.9% in 2015 to 17.9% in 2016. The increase in operating margin before acquisition integration charges in 2016 was primarily due to an increase in operating margin, partially offset by lower acquisition integration charges.

Electrical Systems and Services



	2017			Change from 2016		2016			Change from 2015		2015
Net sales	$	5,666		—	%	$	5,662		(5	)%	$	5,931

Operating profit	$	770		8	%	$	711		(8	)%	$	776
Operating margin	13.6		%			12.6		%			13.1		%

Acquisition integration charges	$	—				$	1				$	15

Before acquisition integration charges
Operating profit	$	770		8	%	$	712		(10	)%	$	791
Operating margin	13.6		%			12.6		%			13.3		%

Net sales were broadly flat in 2017 compared to 2016. Net sales decreased 5% in 2016 compared to 2015 due to a decrease of 3% in organic sales and a decrease of 2% from the impact of negative currency translation. The organic sales decline in 2016 was primarily due to weakness in oil and gas markets and large industrial projects, partially offset by growth in data centers and commercial construction markets.

Operating margin increased from 12.6% in 2016 to 13.6% in 2017. Operating margin increased in 2017 primarily due to savings from restructuring actions and lower restructuring charges, partially offset by commodity inflation. Operating margin decreased from 13.1% in 2015 to 12.6% in 2016. Operating margin decreased in 2016 primarily due to lower sales volumes, unfavorable product mix, and higher restructuring charges, partially offset by savings from restructuring actions and other cost control measures.

Operating margin before acquisition integration charges increased from 12.6% in 2016 to 13.6% in 2017. The increase in operating margin before acquisition integration charges was primarily due to an increase in operating margin. Operating margin before acquisition integration charges decreased from 13.3% in 2015 to 12.6% in 2016. The decrease in operating margin was primarily due to lower operating margins and lower acquisition integration charges.

Hydraulics



	2017			Change from 2016		2016			Change from 2015		2015
Net sales	$	2,468		11	%	$	2,222		(10	)%	$	2,459

Operating profit	$	288		45	%	$	198		(20	)%	$	246
Operating margin	11.7		%			8.9		%			10.0		%

Acquisition integration charges	$	—				$	—				$	2

Before acquisition integration charges
Operating profit	$	288		45	%	$	198		(20	)%	$	248
Operating margin	11.7		%			8.9		%			10.1		%

Net sales in 2017 increased 11% compared to 2016 due to an increase in organic sales of 12% and a decrease of 1% from the impact of negative currency translation. The increase in organic sales in 2017 was due to strength in global mobile equipment markets. Net sales in 2016 decreased 10% compared to 2015 due to a decrease in organic sales of 9% and a decrease of 1% from the impact of negative currency translation. The decrease in organic sales was due to weakness in both the mobile equipment and industrial markets.

Operating margin increased from 8.9% in 2016 to 11.7% in 2017. The increase in operating margin in 2017 was primarily due to higher sales volumes, lower restructuring charges, and savings from restructuring actions, partially offset by commodity inflation. Operating margin decreased from 10.0% in 2015 to 8.9% in 2016. The decrease in operating margin in 2016 was primarily due to lower sales volumes and higher restructuring costs, partially offset by savings from restructuring actions and other cost control measures.

Operating margin before acquisition integration charges decreased from 10.1% in 2015 to 8.9% in 2016. The decrease in operating margin before acquisition integration charges was primarily due to lower operating margins.

Aerospace



	2017			Change from 2016		2016			Change from 2015		2015
Net sales	$	1,744		—	%	$	1,753		(3	)%	$	1,807

Operating profit	$	332		(1	)%	$	335		8	%	$	310
Operating margin	19.0		%			19.1		%			17.2		%

Net sales were broadly flat in 2017 compared to 2016. Net sales in 2016 decreased 3% compared to 2015 due to a decrease of 2% from the impact of negative currency translation and a decrease in organic sales of 1%. The decrease in organic sales during 2016 was primarily due to a decrease in military OEM markets and lower cost reimbursements on certain engineering programs, partially offset by growth in commercial markets.

Operating margin decreased from 19.1% in 2016 to 19.0% in 2017. The decrease was primarily due to higher program development spending, partially offset by savings from restructuring actions. Operating margin increased from 17.2% in 2015 to 19.1% in 2016. The increase was primarily due to savings from restructuring actions, other cost control measures, and reduced program development spending.

Vehicle



	2017			Change from 2016		2016			Change from 2015		2015
Net sales	$	3,333		6	%	$	3,153		(14	)%	$	3,682

Operating profit	$	537		13	%	$	474		(27	)%	$	645
Operating margin	16.1		%			15.0		%			17.5		%

Net sales increased 6% in 2017 compared to 2016 due to an increase in organic sales of 5% and an increase of 2% from the impact of positive currency translation, partially offset by a decrease of 1% from the sale of the business discussed Note 2. The increase in organic sales in 2017 was primarily due to growth in North America. Net sales decreased 14% in 2016 compared to 2015 due to a decrease in organic sales of 13% and a decrease of 1% from the impact of negative currency translation. The decrease in organic sales in 2016 was primarily due to the lower North American Class 8 truck market.

Operating margin increased from 15.0% in 2016 to 16.1% in 2017. The increase in operating margin in 2017 was primarily due to higher sales volumes, lower restructuring costs, and savings from restructuring actions, partially offset by commodity inflation and unfavorable product mix. Operating margin decreased from 17.5% in 2015 to 15.0% in 2016. The decrease in operating margin in 2016 was primarily due to lower sales volume and unfavorable product mix, partially offset by savings from restructuring actions and other cost control measures.

Corporate Expense (Income)



	2017			Change from 2016		2016*		Change from 2015		2015*
Amortization of intangible assets	$	388		(1	)%	$	392	(3	)%	$	406
Interest expense - net	246			6	%	233		—	%	232
Pension and other postretirement benefits expense	45			(25	)%	60		(54	)%	130
Gain on sale of a business	(1,077		)	NM		—		NM		—
Other corporate expense - net	244			57	%	155		(33	)%	232
Total corporate expense (income)	$	(154	)	(118	)%	$	840	(16	)%	$	1,000

Year ended December 31, 2016 and 2015 amounts have been revised to reflect the change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

Corporate results were income of $154 in 2017 compared to expense of $840 in 2016. The change in Total corporate expense (income) in 2017 was primarily due to the gain on the sale of the business discussed in Note 2, partially offset by an increase in other corporate expense. Total corporate expense decreased 16% in 2016 to $840 from $1,000 in 2015 primarily due to a decrease in pension and other postretirement benefits expense, and income from several insurance matters of $64 during the fourth quarter of 2016. The decrease in pension and other postretirement benefits expense resulted from a change to the spot rate approach for measuring service and interest costs, higher discount rates, and updated mortality tables.

LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

Financial Condition and Liquidity

Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk. The Company maintains access to the commercial paper markets through a $2,000 commercial paper program. On November 17, 2017, Eaton refinanced a $500, four-year revolving credit facility with a $500, three-year revolving credit facility that will expire November 17, 2020 and also refinanced a $750, five-year revolving credit facility with a $750, five-year revolving credit facility that will expire November 17, 2022. Eaton also maintains a $750, five-year revolving credit facility that will expire October 14, 2021. These refinancings maintain long-term revolving credit facilities at a total of $2,000. The revolving credit facilities are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton's revolving credit facilities at December 31, 2017 or 2016. The Company had available lines of credit of $741 from various banks primarily for the issuance of letters of credit, of which there was $297 outstanding at December 31, 2017. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business as well as scheduled payments of long-term debt.

On September 15, 2017, a subsidiary of Eaton issued senior notes (the Notes) with a face amount of $1,000. The Notes are comprised of two tranches of $700 and $300 which mature in 2027 and 2047, respectively, with interest payable semi-annually at a respective rate of 3.1% and 3.9%. The issuer received proceeds totaling $993 from the issuance, net of financing costs.

On September 20, 2016, a subsidiary of Eaton issued Euro denominated notes (Euro Notes) with a face value of €550 ($615 based on the September 20, 2016 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The Euro Notes mature in 2024 with interest payable annually at a rate of 0.75%. After financing costs and discounts, the issuer received proceeds totaling €544 ($609 based on the September 20, 2016 spot rate) from the issuance.

For additional information on financing transactions and debt, see Note 6 to the Consolidated Financial Statements.

Eaton’s credit facilities and indentures governing certain long-term debt contain various covenants, the violation of which would limit or preclude the use of the credit facilities for future borrowings, or might accelerate the maturity of the related outstanding borrowings covered by the indentures. At Eaton’s present credit rating level, the most restrictive financial covenant provides that the ratio of secured debt (or lease payments due under a sale and leaseback transaction) to adjusted consolidated net worth (or consolidated net tangible assets, in each case as defined in the relevant credit agreement or indenture) may not exceed 10%. Eaton's actual ratios are substantially below the required threshold. In addition, Eaton is in compliance with each of its debt covenants for all periods presented.

Sources and Uses of Cash

Operating Cash Flow

Net cash provided by operating activities was $2,666 in 2017, an increase of $96 compared to $2,570 in 2016. The increase was driven by higher net income, and lower working capital balances compared to 2016, partially offset by higher pension contributions, including $350 of voluntary contributions to Eaton's U.S. qualified pension plans.

Net cash provided by operating activities was $2,570 in 2016, an increase of $161 compared to $2,409 in 2015. The increase was driven by lower pension contributions and lower working capital balances compared to 2015.

Investing Cash Flow

Net cash used in investing activities was $217 in 2017, a decrease in the use of cash of $312 compared to $529 in 2016. The decrease in 2017 was primarily driven by proceeds of $600 from the sale of the business discussed in Note 2, partially offset by purchases of short-term investments of $298 in 2017 compared to $40 in 2016. Capital expenditures were $520 in 2017 compared to $497 in 2016. Eaton expects approximately $575 in capital expenditures in 2018.

Net cash used in investing activities was $529 in 2016, a decrease in the use of cash of $46 compared to $575 in 2015. The decrease in 2016 was primarily driven by no business acquisitions completed in 2016 and lower capital expenditures in 2016 compared to 2015, partially offset by purchases of short-term investments of $40 in 2016 compared to sales $37 in 2015. Capital expenditures were $497 in 2016 compared to $506 in 2015.

Financing Cash Flow

Net cash used in financing activities was $2,442 in 2017, an increase in the use of cash of $704 compared to $1,738 in 2016. The increase in the use of cash was primarily due to higher payments on borrowings of $1,554 in 2017 compared to $653 in 2016 and higher share repurchases of $850 in 2017 compared to $730 in 2016, partially offset by higher proceeds from borrowings of $1,000 in 2017 compared to $631 in 2016.

Net cash used in financing activities was $1,738 in 2016, a decrease in use of cash of $567 compared to $2,305 in 2015. The decrease in the use of cash was primarily due to lower payments on borrowings of $653 in 2016 compared to $1,027 in 2015 and higher proceeds from borrowings of $631 in 2016 compared to $425 in 2015, partially offset by higher share repurchases of $730 in 2016 compared to $682 in 2015.

Credit Ratings

Eaton's debt has been assigned the following credit ratings:



Credit Rating Agency (long- /short-term rating)	Rating	Outlook
Standard & Poor's	A-/A-2	Negative outlook
Moody's	Baa1/P-2	Stable outlook
Fitch	BBB+/F2	Stable outlook

Defined Benefits Plans

Pension Plans

During 2017, the fair value of plan assets in the Company’s employee pension plans increased $865 to $5,312 at December 31, 2017. The increase in plan assets was primarily due to better than expected return on plan assets, the Company's contributions to the pension plans, and the impact of positive currency translation. At December 31, 2017, the net unfunded position of $1,048 in pension liabilities consisted of $279 in the U.S. qualified pension plans, $925 in plans that have no minimum funding requirements, and $62 in all other plans that require minimum funding, partially offset by $218 in plans that are overfunded.

Funding requirements are a major consideration in making contributions to Eaton’s pension plans. With respect to the Company’s pension plans worldwide, the Company intends to contribute annually not less than the minimum required by applicable law and regulations. In 2017, $473 was contributed to the pension plans. The Company anticipates making $112 of contributions to certain pension plans during 2018. The funded status of the Company’s pension plans at the end of 2018, and future contributions, will depend primarily on the actual return on assets during the year and the discount rate used to calculate certain benefits at the end of the year. Depending on these factors, and the resulting funded status of the pension plans, the level of future contributions could be materially higher or lower than in 2017.

Off-Balance Sheet Arrangements

Eaton does not have off-balance sheet arrangements or financings with unconsolidated entities or other persons. In the ordinary course of business, the Company leases certain real properties and equipment, as described in Note 8 to the Consolidated Financial Statements.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) in the United States requires management to make certain estimates and assumptions that may involve the exercise of significant judgment. For any estimate or assumption used, there may be other reasonable estimates or assumptions that could have been used. However, based on facts and circumstances inherent in developing estimates and assumptions, management believes it is unlikely that applying other such estimates and assumptions would have caused materially different amounts to have been reported. Actual results may differ from these estimates.

Revenue Recognition

Eaton records reductions to revenue for customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels.

Impairment of Goodwill and Other Long-Lived Assets

Goodwill

Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of an operating segment is less than its carrying amount. Events or circumstances that may result in an impairment review include changes in macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, other relevant entity-specific events, specific events affecting the reporting unit or sustained decrease in share price.

Goodwill impairment testing for 2017 was performed using a qualitative analysis, which is performed by assessing certain trends and factors that require significant judgment, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative assessment. The results of these qualitative analyses did not indicate a need to perform a quantitative analysis.

Goodwill impairment testing for 2016 was performed using a quantitative analysis under which the fair value for each reporting unit was estimated using a discounted cash flow model, which considered forecasted cash flows discounted at an estimated weighted-average cost of capital. The forecasted cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the operating segment's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the timing of expected future cash flows of the respective reporting unit. Sensitivity analyses were performed in order to assess the reasonableness of the assumptions and the resulting estimated fair values.

Based on the qualitative analyses performed in 2017 and quantitative analysis performed in 2016, the fair values of Eaton's reporting units continue to substantially exceed their respective carrying amounts.

Indefinite Life Intangible Assets

Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. Events or circumstances that may result in an impairment review include changes in industry and market considerations, cost factors, financial performance, and other relevant entity-specific events that could affect inputs used to determine the respective fair values of the indefinite-lived intangible assets.

For 2017 and 2016, the fair value of indefinite lived intangible assets exceeded the respective carrying value.

Other Long-Lived Assets

Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Events or circumstances that may result in an impairment review include operations reporting losses, a significant adverse change in the use of an asset, the planned disposal or sale of the asset, a significant adverse change in the business climate or legal factors related to the asset, or a significant decrease in the estimated market value of an asset. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. In instances where the carrying amount of the asset group exceeded the undiscounted cash flows, the fair value of the asset group would be determined and an impairment loss would be recognized based on the amount by which the carrying value of the asset group exceeds its fair value. Determining asset groups and underlying cash flows requires the use of significant judgment.

For additional information about goodwill and other intangible assets, see Note 5 to the Consolidated Financial Statements.

Recoverability of Deferred Income Tax Assets

Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine the income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards.

Management evaluates the realizability of deferred income tax assets for each jurisdiction in which it operates. If the Company experiences cumulative pretax income in a particular jurisdiction in a three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pretax losses in a particular jurisdiction in a three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in a particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as the Company’s goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance. For additional information about income taxes, see Note 9 to the Consolidated Financial Statements.

Pension and Other Postretirement Benefits Plans

The measurement of liabilities related to pension plans and other postretirement benefits plans is based on assumptions related to future events including interest rates, return on plan assets, rate of compensation increases, and health care cost trend rates. Actual plan asset performance will either reduce or increase losses included in accumulated other comprehensive loss, which ultimately affects net income.

The discount rate for United States plans was determined by discounting the expected future benefit payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date and solving for the single rate that generated the same benefit obligation. Only corporate bonds with a rating of Aa or higher by either Moody’s or Standard & Poor's were included. Callable bonds that are not make-whole bonds and certain other non-comparable bonds were eliminated. Finally, a subset of bonds was selected by grouping the universe of bonds by duration and retaining 50% of the bonds that had the highest yields.

The discount rates for non-United States plans were determined by region and are based on high quality long-term corporate and government bonds. Consideration has been given to the duration of the liabilities in each plan when selecting the bonds to be used in determining the discount rate.

Key assumptions used to calculate pension and other postretirement benefits expense are adjusted at each year-end. A 1-percentage point change in the assumed rate of return on pension plan assets is estimated to have approximately a $46 effect on pension expense. Likewise, a 1-percentage point change in the discount rate is estimated to have approximately a $69 effect on pension expense. A 1-percentage point change in the assumed rate of return on other postretirement benefits assets is estimated to have approximately a $1 effect on other postretirement benefits expense. A 1-percentage point change in the discount rate is estimated to have approximately a $3 effect on expense for other postretirement benefits plans.

Additional information related to changes in key assumptions used to recognize expense for other postretirement benefits plans is found in Note 7 to the Consolidated Financial Statements.

Environmental Contingencies

As a result of past operations, Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party under the United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites.

A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. At December 31, 2017 and 2016, $120 and $124, respectively, was accrued for these costs.

MARKET RISK DISCLOSURE

On a regular basis, Eaton monitors third-party depository institutions that hold its cash and short-term investments, primarily for safety of principal and secondarily for maximizing yield on those funds. The Company diversifies its cash and short-term investments among counterparties to minimize exposure to any one of these entities. Eaton also monitors the creditworthiness of its customers and suppliers to mitigate any adverse impact.

Eaton uses derivative instruments to manage exposure to volatility in raw material costs, currency, and interest rates on certain debt instruments. Derivative financial instruments used by the Company are straightforward and non-leveraged. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. See Note 13 to the Consolidated Financial Statements for additional information about hedges and derivative financial instruments.

Eaton’s ability to access the commercial paper market, and the related cost of these borrowings, is based on the strength of its credit rating and overall market conditions. The Company has not experienced any material limitations in its ability to access these sources of liquidity. At December 31, 2017, Eaton had $2,000 of long-term revolving credit facilities with banks in support of its commercial paper program. It has no borrowings outstanding under these credit facilities.

Interest rate risk can be measured by calculating the short-term earnings impact that would result from adverse changes in interest rates. This exposure results from short-term debt, which includes commercial paper at a floating interest rate, long-term debt that has been swapped to floating rates, and money market investments that have not been swapped to fixed rates. Based upon the balances of investments and floating rate debt at year end 2017, a 100 basis-point increase in short-term interest rates would have increased the Company’s net, pretax interest expense by $30.

Eaton also measures interest rate risk by estimating the net amount by which the fair value of the Company’s financial liabilities would change as a result of movements in interest rates. Based on Eaton’s best estimate for a hypothetical, 100 basis point decrease in interest rates at December 31, 2017, the market value of the Company’s debt and interest rate swap portfolio, in aggregate, would increase by $537.

The Company is exposed to currency risk associated with translating its functional currency financial statements into its reporting currency, which is the U.S. dollar. As a result, the Company is exposed to movements in the exchange rates of various currencies against the U.S. dollar. Eaton also monitors exposure to transactions denominated in currencies other than the functional currency of each country in which the Company operates, and regularly enters into forward contracts to mitigate that exposure. In the aggregate, Eaton’s portfolio of forward contracts related to such transactions was not material to its Consolidated Financial Statements.

CONTRACTUAL OBLIGATIONS

A summary of contractual obligations as of December 31, 2017 follows:



	2018			2019 to 2020			2021 to 2022			Thereafter			Total
Long-term debt, including current portion(1)	$	578		$	581		$	2,003		$	4,549		$	7,711
Interest expense related to long-term debt	284			497			453			1,965			3,199
Reduction of interest expense from interest rate swap agreements related to long-term debt	(19		)	(14		)	(12		)	(46		)	(91		)
Operating leases	159			204			105			71			539
Purchase obligations	958			93			9			4			1,064
Other obligations	155			9			8			23			195
Total	$	2,115		$	1,370		$	2,566		$	6,566		$	12,617

(1) Long-term debt excludes deferred gains and losses on derivatives related to debt, adjustments to fair market value, and premiums and discounts on long-term debentures.

Interest expense related to long-term debt is based on the fixed interest rate, or other applicable interest rate, related to the debt instrument. The reduction of interest expense due to interest rate swap agreements related to long-term debt is based on the difference in the fixed interest rate the Company receives from the swap, compared to the floating interest rate the Company pays on the swap. Purchase obligations are entered into with various vendors in the normal course of business. These amounts include commitments for purchases of raw materials, outstanding non-cancelable purchase orders, releases under blanket purchase orders, and commitments under ongoing service arrangements. Other long-term obligations principally include anticipated contributions of $112 to pension plans in 2018 and $45 of deferred compensation earned under various plans for which the participants have elected to receive disbursement at a later date.

The table above does not include future expected pension benefit payments or expected other postretirement benefits payments. Information related to the amounts of these future payments is described in Note 7 to the Consolidated Financial Statements. The table above also excludes the liability for unrecognized income tax benefits, since the Company cannot predict with reasonable certainty the timing of cash settlements with the respective taxing authorities. At December 31, 2017, the gross liability for unrecognized income tax benefits totaled $735 and interest and penalties were $80.

FORWARD-LOOKING STATEMENTS

This Annual Report to Shareholders contains forward-looking statements concerning litigation and regulatory developments, expected pension or other post-retirement benefit payments, and rates of return and expected future liquidity. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; war, 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.

QUARTERLY DATA (unaudited)



	Quarter ended in 2017												Quarter ended in 2016
(In millions except for per share data)	Dec. 31			Sept. 30*			June 30*			Mar. 31*			Dec. 31*			Sept. 30*			June 30*			Mar. 31*
Net sales	$	5,213		$	5,211		$	5,132		$	4,848		$	4,867		$	4,987		$	5,080		$	4,813
Gross profit	1,678			1,745			1,684			1,541			1,548			1,613			1,658			1,519
Percent of net sales	32.2		%	33.5		%	32.8		%	31.8		%	31.8		%	32.3		%	32.6		%	31.6		%
Income before income taxes	635			1,694			572			467			559			570			550			439
Net income	634			1,401			517			434			508			520			490			401
Less net (income) loss for noncontrolling interests	—			—			(1		)	—			(4		)	1			(1		)	1
Net income attributable to Eaton ordinary shareholders	$	634		$	1,401		$	516		$	434		$	504		$	521		$	489		$	402

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	1.43		$	3.14		$	1.15		$	0.96		$	1.12		$	1.14		$	1.07		$	0.87
Basic	1.44			3.16			1.16			0.97			1.12			1.15			1.07			0.88

Cash dividends declared per ordinary share	$	0.60		$	0.60		$	0.60		$	0.60		$	0.57		$	0.57		$	0.57		$	0.57

Market price per ordinary share
High	$	82.34		$	81.63		$	79.31		$	74.63		$	70.00		$	68.20		$	63.98		$	63.99
Low	74.90			69.82			73.42			66.60			59.07			58.28			54.30			46.19

Earnings per share for the four quarters in a year may not equal full year earnings per share.

Acquisition integration charges included in Income before income taxes are as follows:

	Quarter ended in 2017												Quarter ended in 2016
	Dec. 31			Sept. 30			June 30			Mar. 31			Dec. 31			Sept. 30			June 30			Mar. 31
Acquisition integration charges	$	1		$	1		$	1		$	1		$	1		$	1		$	1		$	1

*Certain amounts have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

FIVE-YEAR CONSOLIDATED FINANCIAL SUMMARY (unaudited)



(In millions except for per share data)	2017			2016*			2015*			2014*			2013*
Net sales	$	20,404		$	19,747		$	20,855		$	22,552		$	22,046
Income before income taxes	3,368			2,118			2,133			1,762			1,870
Net income	2,986			1,919			1,974			1,804			1,864
Less net income for noncontrolling interests	(1		)	(3		)	(2		)	(10		)	(12		)
Net income attributable to Eaton ordinary shareholders	$	2,985		$	1,916		$	1,972		$	1,794		$	1,852

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	6.68		$	4.20		$	4.22		$	3.76		$	3.88
Basic	6.71			4.21			4.23			3.78			3.91

Weighted-average number of ordinary shares outstanding
Diluted	447.0			456.5			467.1			476.8			476.7
Basic	444.5			455.0			465.5			474.1			473.5

Cash dividends declared per ordinary share	$	2.40		$	2.28		$	2.20		$	1.96		$	1.68

Total assets	$	32,623		$	30,476		$	31,059		$	33,557		$	35,511
Long-term debt	7,167			6,711			7,746			7,982			8,920
Total debt	7,751			8,277			8,414			8,992			9,500
Eaton shareholders' equity	17,253			14,954			15,249			15,856			16,860
Eaton shareholders' equity per ordinary share	$	39.22		$	33.28		$	33.24		$	33.89		$	35.49
Ordinary shares outstanding	439.9			449.4			458.8			467.9			475.1

*Certain amounts for the years 2013 through 2016 have been adjusted to reflect the retrospective application of the Company's change in inventory accounting method, as described in Notes 1 and 14 to the consolidated financial statements.

Previous: Item 15. Exhibits, Financial Statement Schedules.



	Other postretirement benefits plans
	2017		2016		2015
Assumptions used to determine benefit obligation at year-end
Discount rate	3.55	%	3.96	%	4.04	%
Health care cost trend rate assumed for next year	8.25	%	7.35	%	7.10	%
Ultimate health care cost trend rate	4.75	%	4.75	%	4.75	%
Year ultimate health care cost trend rate is achieved	2027		2026		2025

Assumptions used to determine expense
Discount rate used to determine benefit obligation	3.96	%	4.04	%	3.79	%
Discount rate used to determine service cost	4.11	%	4.26	%	3.79	%
Discount rate used to determine interest cost	3.18	%	3.12	%	3.79	%
Initial health care cost trend rate	7.35	%	7.10	%	6.31	%
Ultimate health care cost trend rate	4.75	%	4.75	%	4.77	%
Year ultimate health care cost trend rate is achieved	2026		2025		2024



	1% increase		1% decrease
Effect on total service and interest cost	$	1	$	(1	)
Effect on other postretirement liabilities	13		(12		)



	Estimated United States pension payments			Estimated non-United States pension payments			Estimated other postretirement benefit payments
			Gross			Medicare prescription drug subsidy
2018	$	291		$	88		$	47	$	(2	)
2019	291			90			43		(2		)
2020	292			93			39		(2		)
2021	299			95			35		(1		)
2022	298			99			35		—
2023 - 2027	1,478			548			141		(2		)



	Real estate			Other			Total
Balance at December 31, 2015	$	7		$	86		$	93
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end	—			(6		)	(6		)
Purchases, sales, settlements - net	(1		)	15			14
Transfers into or out of Level 3	—			—			—
Balance at December 31, 2016	6			95			101
Actual return on plan assets:
Gains (losses) relating to assets still held at year-end	1			(5		)	(4		)
Purchases, sales, settlements - net	12			(17		)	(5		)
Transfers into or out of Level 3	—			—			—
Balance at December 31, 2017	$	19		$	73		$	92