Eaton (ETN) 10-K risk factor changes: FY2018 vs FY2017

Eaton's operating results depend in part on continued successful research, development, and marketing of new and/or improved products and services, and there can be no assurance that Eaton will continue to successfully introduce new products and [removed: services.][added: services or maintain its present market positions.]

If Eaton is unable to protect its information technology infrastructure against service interruptions, data corruption, cyber-based attacks or network security breaches, [added: product or service offerings could be compromised or] operations could be disrupted or data confidentiality lost.

Operating globally subjects Eaton to changes in government regulations and policies in a large number of jurisdictions around the world, including those related to tariffs and trade barriers, investments, property ownership rights, taxation, [added: data privacy,] and exchange controls.

Further, existing free trade laws and [removed: regulations, such as the North American Free Trade Agreement,] [added: regulations] provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements.

The Company's effective tax rate could be affected by changes in the mix among earnings in countries with differing statutory tax rates, changes in the valuation allowance of deferred tax assets, or changes in tax [removed: laws.][added: legislation, regulations, and policies.]

Information regarding current legal proceedings is presented in Note [removed: 8] [added: 9] and Note [removed: 9] [added: 10] of the Notes to the Consolidated Financial Statements.

The Company's market positions may also be impacted by new entrants into Eaton's product or regional markets.

Eaton Corporation plc (Eaton or the Company) is a power management company with [removed: 2017] [added: 2018] net sales of [removed: $20.4] [added: $21.6] billion.

The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical power more [removed: efficiently,] [added: reliably,] safely and sustainably.

Eaton has approximately [removed: 96,000] [added: 99,000] employees in 59 countries and sells products to customers in more than 175 countries.

Information by business segment [removed: and geographic region] regarding principal products, principal markets, methods of [removed: distribution, net sales, operating profit] [added: distribution] and [removed: assets] [added: net sales] is presented in Note [removed: 15] [added: 16] of the Notes to the Consolidated Financial Statements.

In [removed: 2017, 21%] [added: 2018, 23%] of these segments' sales were made to [removed: six] [added: seven] large distributors of electrical products and electrical systems and services.

In [removed: 2017, 9%] [added: 2018, 11%] of this segment's sales were made to [removed: three] [added: four] large original equipment manufacturers or distributors of agricultural, construction, and industrial equipment and parts.

In [removed: 2017, 29%] [added: 2018, 26%] of this segment's sales were made to three large original equipment manufacturers of aircraft.

In [removed: 2017, 69%] [added: 2018, 61%] of this segment's sales were made to nine large original equipment manufacturers of vehicles and related components.

In [removed: 2017,] [added: 2018,] Eaton maintained appropriate levels of inventory to prevent shortages and did not experience any availability constraints.

The Company's products are manufactured, marketed and sold under a portfolio of patents, trademarks, licenses, and other forms of intellectual property, some of which expire [removed: or are allowed to lapse at various dates] in the future.

Using this criterion, total backlog at December 31, [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] was approximately [removed: $4.8] [added: $5.3] billion and [removed: $4.0] [added: $4.8] billion, respectively.

Eaton's estimated capital expenditures for environmental control facilities are not expected to be material for [removed: 2018] [added: 2019] and [removed: 2019.][added: 2020.]

Information regarding the Company's liabilities related to environmental matters is presented in Note [removed: 8] [added: 9] of the Notes to the Consolidated Financial Statements.

eMobility

Principal methods of competition in this segment are product performance, technology, global service, and price.

Eaton has a strong competitive position in this segment.

In 2018, 19% of this segment's sales were made to four large original equipment manufacturers of vehicles, construction equipment and related components.

Research and Development

Research and development expenses for new products and improvement of existing products in 2017, 2016 and 2015 were $584 million, $589 million, and $625 million, respectively.

Over the past five years, the Company has invested approximately $3.1 billion in research and development.

Information regarding the Company's current legal proceedings is presented in Note [removed: 8] [added: 9] and Note [removed: 9] [added: 10] of the Notes to the Consolidated Financial Statements.

For the year ended December 31, [removed: 2017][added: 2018]

The aggregate market value of Ordinary Shares held by non-affiliates of the registrant as of June 30, [removed: 2017] [added: 2018] was [removed: $34.6] [added: $32.4] billion.

As of January 31, [removed: 2018,] [added: 2019,] there were [removed: 440.2] [added: 423.6] million Ordinary Shares outstanding.

Portions of the Proxy Statement for the [removed: 2018] [added: 2019] annual shareholders meeting are incorporated by reference into Part III.

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10-K 1 etn12312018form10-k.htm 10-K

| [Part I](#sDDF646DAF978563FA7F83529C6284724) | | | [2](#sDDF646DAF978563FA7F83529C6284724) |

| [Part II](#sAF306BC131665E55BC25C1ED13D50B1B) | | | [5](#sAF306BC131665E55BC25C1ED13D50B1B) |

| [Part IV](#sF5E14E67F9495FFF9F077340A285A89C) | | | [10](#sF5E14E67F9495FFF9F077340A285A89C) |

| [SIGNATURES](#s8575AD43291A5A21A3DCDC2416050497) | | | [15](#s8575AD43291A5A21A3DCDC2416050497) |

10-K 1 etn12312017form10-k.htm 10-K

| [Part I](#s5D82B12BC04F581EB4D9CDA57CECA25A) | | | [2](#s5D82B12BC04F581EB4D9CDA57CECA25A) |

| [Part II](#s138BB9A056C553DD80D6C232E16140C9) | | | [6](#s138BB9A056C553DD80D6C232E16140C9) |

| [Part IV](#sE626088EE0B55ABABA167BCB9FBB069C) | | | [10](#sE626088EE0B55ABABA167BCB9FBB069C) |

| [SIGNATURES](#s2C78BE5EE63F5B0A839B7D9F932A6A45) | | | [15](#s2C78BE5EE63F5B0A839B7D9F932A6A45) |

The Company maintains manufacturing facilities at approximately [removed: 327] [added: 284] locations in 42 countries.

Executive Officers of the Registrant

Information regarding executive officers of the Company is presented in Item 10 of this Form 10-K Report.

The Company's ordinary shares are listed for trading on the New York Stock [removed: Exchange.][added: Exchange under the symbol ETN.]

At December 31, [removed: 2017,] [added: 2018,] there were [removed: 13,089] [added: 12,846] holders of record of the Company's ordinary shares.

Additionally, [removed: 20,138] [added: 18,972] current and former employees were shareholders through participation in the Eaton Savings Plan (ESP), Eaton Personal Investment Plan (EPIP), and the Eaton Puerto Rico Retirement Savings Plan.

During the fourth quarter of [removed: 2017, 0.8] [added: 2018, 9.8] million ordinary shares were repurchased in the open market at a total cost of [removed: $61] [added: $700] million.

[removed: These] [added: Approximately 5.5 million of these] shares were repurchased under the program approved by the Board on February 24, 2016.

A summary of the shares repurchased in the fourth quarter of [removed: 2017] [added: 2018] follows:

| October | | 1,455,792 | | | $ | 71.11 | | | 1,455,792 | | | $ | 298 | |

| November | | 3,998,803 | | | $ | 73.81 | | | 3,998,803 | | | $ | 3 | |

| December | | 4,388,605 | | | $ | 68.68 | | | 46,891 | | | $ | — | |

| Total | | 9,843,200 | | | $ | 71.12 | | | 5,501,486 | | | | | |

Information regarding cash dividends paid, and the high and low market price per ordinary share, for each quarter in 2017 and 2016 is presented in “Quarterly Data” of this Form 10-K.

| October | | — | | | $ | — | | | — | | | $ | 1,064 | |

| November | | 781,958 | | | $ | 78.77 | | | 781,958 | | | $ | 1,002 | |

| December | | — | | | $ | — | | | — | | | $ | 1,002 | |

| Total | | 781,958 | | | $ | 78.77 | | | 781,958 | | | | | |

Information regarding selected quarterly financial information for [removed: 2017] [added: 2018] and [removed: 2016] [added: 2017] is presented in “Quarterly Data” of this Form 10-K.

Based on that evaluation, Eaton's management concluded that the Company's disclosure controls and procedures were effective as of December 31, [removed: 2017.][added: 2018.]

“Report of Independent Registered Public Accounting Firm” relating to internal control over financial reporting as of December 31, [removed: 2017] [added: 2018] is included in Item 15 of this Form 10-K.

During the fourth quarter of [removed: 2017,] [added: 2018,] there was no change in Eaton's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

During the fourth [removed: quarter,] [added: quarter 2018,] certain of our wholly-owned non-U.S. subsidiaries sold various [removed: electrical] products to customers in Iran.

We received total revenue of approximately [removed: 1,220,762] [added: 820,559] Euros and realized net profits of approximately [removed: 399,894] [added: 268,547] Euros from the sales (approximately [removed: $1,443,658] [added: $933,380] and [removed: $472,910] [added: $305,470] in whole U.S. dollars, respectively).

Eaton has determined not to take any future orders for sales to Iran.

One or more of our non-U.S. subsidiaries intend to continue doing business in Iran under General License H in compliance with U.S. economic sanctions and export control laws, though the Company has no assets or employees in Iran.

Information required with respect to the directors of the Company is set forth under the caption “Election of Directors” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

A listing of executive officers, their ages, positions and offices held over the past five years, as of February [removed: 1, 2018,] [added: 15, 2019,] follows:

| Craig Arnold | | [removed: 57] [added: 58] | | Chairman of Eaton Corporation plc (June 1, 2016 - present) |

| Richard H. Fearon | | [removed: 61] [added: 62] | | Director of Eaton Corporation plc (September 1, 2015 - present) |

| [removed: Revathi Advaithi] [added: Uday Yadav] | | [removed: 50] [added: 55] | | Chief Operating Officer - [removed: Electrical] [added: Industrial] Sector of Eaton Corporation |

| Heath B. Monesmith | | [removed: 47] [added: 48] | | Executive Vice President and General Counsel of Eaton Corporation |

| Thomas E. Moran | | [removed: 53] [added: 54] | | Senior Vice President and Secretary of Eaton Corporation plc (November 27, 2012 - present) |

| Ken D. Semelsberger | | [removed: 56] [added: 57] | | Senior Vice President and Controller of Eaton Corporation (November 1, 2013 - present) |

| Joao V. Faria | | [removed: 53] [added: 54] | | President - Vehicle Group of Eaton Corporation (May 1, 2017 - present) |

| Curtis J. Hutchins | | [removed: 52] [added: 53] | | President - Hydraulics Group of Eaton Corporation (August 1, 2015 - present) |

| Nandakumar Cheruvatath | | [removed: 56] [added: 57] | | President - Aerospace Group of Eaton Corporation (September 1, 2015 - present) |

| Richard M. Eubanks, Jr. (Mark) | | [removed: 45] [added: 46] | | President - Electrical Products Group of Eaton Corporation (September 1, 2015 - present) |

| [removed: William J. VanLandingham II] [added: Brian S. Brickhouse] | | 55 | | President - Electrical Systems and Services Group of Eaton Corporation [added: (July 1, 2018 - present)] |

| | | | | President, [removed: Crouse-Hinds Business,] [added: Power Quality Division,] Electrical Sector [removed: ( December 1,] [added: - Americas (August 15,] 2012 - [removed: August 31,] [added: May 14,] 2015) |

Information required with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption “Section 16(a) Beneficial Ownership [removed: Reporting”] [added: Reporting Compliance”] in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

There were no changes during the fourth quarter [removed: 2017] [added: 2018] to the procedures by which security holders may recommend nominees to the Company's Board of Directors.

Information related to the Audit Committee, and members of the Committee who are financial experts, is set forth under the caption “Board Committees - Audit Committee” in the definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

| | | | | President, Asia Pacific Region, Electrical (May 15, 2015 - June 30, 2018) |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | |

| | | | | (September 1, 2015 - present) |

| | | | | President of Electrical Sector, Americas of Eaton Corporation |

| | | | | (April 1, 2012 - August 31, 2015) |

| Uday Yadav | | 54 | | Chief Operating Officer - Industrial Sector of Eaton Corporation |

| | | | | (September 1, 2015 - present) |

| Cynthia K. Brabander | | 56 | | Executive Vice President and Chief Human Resources Officer of Eaton Corporation |

| | | | | (March 1, 2012 - present) |

Information required with respect to executive compensation is set forth under the caption “Compensation Discussion and Analysis” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Information required with respect to securities authorized for issuance under equity-based compensation plans is set forth under the caption “Equity Compensation Plans” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Information required with respect to security ownership of certain beneficial owners, is set forth under the caption “Share Ownership Tables” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Information required with respect to certain relationships and related transactions is set forth under the caption “Review of Related Person Transactions” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Information required with respect to director independence is set forth under the caption “Director Independence” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Information required with respect to principal accountant fees and services is set forth under the caption “Audit Committee Report” in the Company's definitive Proxy Statement to be filed on or about March [removed: 16, 2018,] [added: 15, 2019,] and is incorporated by reference.

Consolidated Statements of Income - Years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015][added: 2016]

Consolidated Statements of Comprehensive Income - Years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015][added: 2016]

Consolidated Balance Sheets - December 31, [removed: 2017] [added: 2018] and [removed: 2016][added: 2017]

Consolidated Statements of Cash Flows - Years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015][added: 2016]

Consolidated Statements of Shareholders' Equity - Years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015][added: 2016]

| 4.3 | [Supplemental Indenture No. 2, dated as of January 8, 2013, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference [added: to] Exhibit 4.3 of the registrant's Form S-4 filed on September 6, 2013)](http://www.sec.gov/Archives/edgar/data/31277/000119312513359886/d576218dex43.htm) | |

| 4.4 | [Supplemental Indenture No. 3, dated as of December 20, 2013, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee [removed: - Filed in conjunction with this] [added: (incorporated by reference to Exhibit 4.4 of the registrant's] Form 10-K [removed: Report *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex44.htm)] [added: filed on February 28, 2018)](http://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex44.htm)] | |

| 4.5 | [Supplemental Indenture No. 4, dated as of December 20, 2017 and effective as of January 1, 2018, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee [removed: - Filed in conjunction with this] [added: (incorporated by reference to Exhibit 4.5 of the registrant's] Form 10-K [removed: Report *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex45.htm)] [added: filed on February 28, 2018)](http://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex45.htm)] | |

| 4.6 | [Supplemental Indenture No. 5, dated as of February 16, 2018, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee [removed: - Filed in conjunction with this] [added: (incorporated by reference to Exhibit 4.6 of the registrant's] Form 10-K [removed: Report *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex46.htm)] [added: filed on February 28, 2018)](http://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex46.htm)] | |

| [removed: 12] [added: 24] | | [removed: [Ratio] [added: [Power] of [removed: Earnings to Fixed Charges] [added: Attorney] - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex12.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex24.htm)] |

| [removed: 18] [added: 23] | | [removed: [Change in] [added: [Consent of Independent Registered Public] Accounting [removed: Principles] [added: Firm] - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex18.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex23.htm)] |

| 21 | | [Subsidiaries of Eaton Corporation plc - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex21.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex21.htm)] |

| 31.1 | | [Certification of Principal Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex311.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex311.htm)] |

| 31.2 | | [Certification of Principal Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 302) - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex312.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex312.htm)] |

| 32.1 | | [Certification of Principal Executive Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex321.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex321.htm)] |

| 32.2 | | [Certification of Principal Financial Officer (Pursuant to the Sarbanes-Oxley Act of 2002, Section 906) - Filed in conjunction with this Form 10-K Report [removed: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex322.htm)] [added: *](https://www.sec.gov/Archives/edgar/data/1551182/000155118219000045/etn12312018ex322.htm)] |

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] (ii) Consolidated Statements of Comprehensive Income for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] (iii) Consolidated Balance Sheets at December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] (iv) Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015,] [added: 2016,] (v) Consolidated Statements of Shareholders' Equity for the years ended December 31, [removed: 2017, 2016] [added: 2018, 2017] and [removed: 2015] [added: 2016] and (vi) Notes to Consolidated Financial Statements for the year ended December 31, [removed: 2017.][added: 2018.]

| | | |

| | | |

| 23 | | [Consent of Independent Registered Public Accounting Firm - Filed in conjunction with this Form 10-K Report *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex23.htm) |

| 24 | | [Power of Attorney - Filed in conjunction with this Form 10-K Report *](https://www.sec.gov/Archives/edgar/data/1551182/000155118218000074/etn12312017ex24.htm) |

| Date: | February [removed: 28, 2018] [added: 27, 2019] | By: | /s/ Richard H. Fearon |

Date: February [removed: 28, 2018][added: 27, 2019]

To the Shareholders and [added: the] Board of Directors of Eaton Corporation plc

We have audited the accompanying consolidated balance sheets of Eaton Corporation plc (“the Company”) as of December 31, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] 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, [removed: 2017,] [added: 2018,] 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, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] and the results of its operations and its cash flows for each of the three years in the period ended December 31, [removed: 2017,] [added: 2018,] 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, [removed: 2017,] [added: 2018,] 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 [removed: 28, 2018] [added: 27, 2019] expressed an unqualified opinion thereon.

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, [removed: 2017.][added: 2018.]

The opinion of Ernst & Young LLP, Eaton's independent registered public accounting firm, on those [added: consolidated] financial statements is included herein.

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, [added: internal] control, audits and financial reporting.

To the Shareholders and [added: the] Board of Directors of Eaton Corporation plc

We have audited Eaton Corporation plc’s (“the Company”) internal control over financial reporting as of December 31, [removed: 2017,] [added: 2018,] 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, [removed: 2017,] [added: 2018,] 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, [removed: 2017] [added: 2018] and [removed: 2016,] [added: 2017,] 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, [removed: 2017] [added: 2018] and the related notes and our report dated February [removed: 28, 2018] [added: 27, 2019] expressed an unqualified opinion thereon.

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, [removed: 2017.][added: 2018.]

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, [removed: 2017.][added: 2018.]

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, [removed: 2017.][added: 2018.]

| (In millions except for per share data) | [added: 2018 | | | |] 2017 | | | | [removed: 2016*] [added: 2016] | | | | [removed: 2015*] [added: 2015] | | | [added: | 2014 | | |]

| Net sales | $ | [added: 21,609 | | | $ |] 20,404 | | | $ | 19,747 | | | $ | 20,855 | | [added: | $ | 22,552 | |]

| Cost of products sold | [removed: 13,756] [added: 14,511] | | | | [removed: 13,409] [added: 13,756] | | | | [removed: 14,304] [added: 13,396] | | |

| Selling and administrative expense | [removed: 3,565] [added: 3,548] | | | | [removed: 3,505] [added: 3,526] | | | | [removed: 3,596] [added: 3,464] | | |

| Research and development expense | 584 | | | | [removed: 589] [added: 584] | | | | [removed: 625] [added: 587] | | |

| Interest expense - net | [removed: 246] [added: 271] | | | | [removed: 233] [added: 246] | | | | [removed: 232] [added: 233] | | |

| Gain on sale of business | [removed: 1,077] [added: —] | | | | [removed: —] [added: 1,077] | | | | — | | |

| Other [removed: income] [added: (income) expense] - net | [removed: (38] [added: (4] | | ) | | [removed: (107] [added: 1] | | [removed: )] | | [removed: (35] [added: (51] | | ) |

| Income before income taxes | [added: 2,424 | | | |] 3,368 | | | | 2,118 | | | | 2,133 | | | [added: | 1,762 | | |]

| Income tax expense | [removed: 382] [added: 278] | | | | [removed: 199] [added: 382] | | | | [removed: 159] [added: 199] | | |

| Net income | [added: 2,146 | | | |] 2,986 | | | | 1,919 | | | | 1,974 | | | [added: | 1,804 | | |]

| Less net income for noncontrolling interests | (1 | | ) | | [removed: (3] [added: (1] | | ) | | [removed: (2] [added: (3] | | ) |

| Net income attributable to Eaton ordinary shareholders | $ | [added: 2,145 | | | $ |] 2,985 | | | $ | 1,916 | | | $ | 1,972 | | [added: | $ | 1,794 | |]

| Diluted | $ | [added: 4.91 | | | $ |] 6.68 | | | $ | 4.20 | | | $ | 4.22 | | [added: | $ | 3.76 | |]

| Basic | [added: 4.93 | | | |] 6.71 | | | | 4.21 | | | | 4.23 | | | [added: | 3.78 | | |]

| Diluted | [added: 436.9 | | | |] 447.0 | | | | 456.5 | | | | 467.1 | | | [added: | 476.8 | | |]

| Basic | [added: 434.3 | | | |] 444.5 | | | | 455.0 | | | | 465.5 | | | [added: | 474.1 | | |]

| Cash dividends declared per ordinary share | $ | [added: 2.64 | | | $ |] 2.40 | | | $ | 2.28 | | | $ | 2.20 | | [added: | $ | 1.96 | |]

| (In millions) | [removed: 2017] [added: 2018] | | | | [removed: 2016*] [added: 2017] | | | | [removed: 2015*] [added: 2016] | | |

| Net income | [removed: $] [added: 2,146] | [removed: 2,986] | | | [removed: $] [added: 2,986] | [removed: 1,919] | | | [removed: $] [added: 1,919] | [removed: 1,974] | |

| Less net income for noncontrolling interests | (1 | | ) | | [removed: (3] [added: (1] | | ) | | [removed: (2] [added: (3] | | ) |

| Net income attributable to Eaton ordinary shareholders | [removed: 2,985] [added: $] | [added: 2,145] | | | [removed: 1,916] [added: $] | [added: 2,985] | | | [removed: 1,972] [added: $] | [added: 1,916] | |

| Currency translation and related hedging instruments | [removed: 807] [added: (609] | | [added: )] | | [removed: (570] [added: 807] | | [removed: )] | | [removed: (1,078] [added: (570] | | ) |

| Pensions and other postretirement benefits | [removed: 241] [added: (139] | | [added: )] | | [removed: (6] [added: 241] | | [removed: )] | | [removed: 111] [added: (6] | | [added: )] |

February 27, 2019

| February 27, 2019 | | | | |

February 27, 2019

| February 27, 2019 | | | | |

| Arbitration decision expense | 275 | | | | — | | | | — | | |

| (In millions) | 2018 | | | | 2017 | | |

| Total assets | $ | 31,092 | | | $ | 32,623 | |

| Payments for settlement of currency exchange contracts not designated as hedges - net | (110 | | ) | | — | | | | — | | |

| Cumulative-effect adjustment upon adoption of ASU 2014-09 | — | | | — | | | | — | | | | (2 | | ) | | — | | | | — | | | | (2 | | ) | | — | | | | (2 | | ) |

| Cumulative-effect adjustment upon adoption of ASU 2016-16 | — | | | — | | | | — | | | | (199 | | ) | | — | | | | — | | | | (199 | | ) | | — | | | | (199 | | ) |

| Net income | — | | | — | | | | — | | | | 2,145 | | | | — | | | | — | | | | 2,145 | | | | 1 | | | | 2,146 | | |

| Balance at December 31, 2018 | 423.6 | | | $ | 4 | | | $ | 12,090 | | | $ | 8,161 | | | $ | (4,145 | ) | | $ | (3 | ) | | $ | 16,107 | | | $ | 35 | | | $ | 16,142 | |

Income from equity investments is reported in Other (income) expense - net.

During the first quarter of 2018, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses.

The new reportable business segment is eMobility (which includes certain legacy Electrical Products and Vehicle product lines).

For reportable segments that were re-segmented, previously reported segment financial information has been updated for 2016 and 2017.

Adoption of New Accounting Standards

The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

| Consolidated Balance Sheet | | Balance at December 31, 2017 | | | | Adjustments due to ASU 2014-09 | | | | Balance at January 1, 2018 | | |

| Assets | | | | | | | | | | | | |

| | Accounts receivable - net | $ | 3,943 | | | $ | (99 | ) | | $ | 3,844 | |

| Liabilities and shareholders' equity | | | | | | | | | | | | |

| | Eaton shareholders' equity | 17,253 | | | | (2 | | ) | | 17,251 | | |

Upon adoption, the Company recorded a cumulative-effect adjustment of $199 to reduce retained earnings.

Eaton adopted Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), at the start of the first quarter of 2018.

The new standard requires companies to present service costs consistent with other employee compensation costs on the income statement and separate from all other elements of pension costs.

The retrospective adoption of this standard resulted in an increase in Selling and administrative expense with a corresponding increase in Other income - net of $6 for the year ended December 31, 2018, a reduction in Selling and administrative expense with a corresponding decrease in Other income - net of $39 for the year ended December 31, 2017, and a reduction in Cost of products sold, Selling and administrative expense, and Research and development expense with a corresponding decrease in Other income - net of $56 for the year ended December 31, 2016.

Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services.

The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer.

Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period.

For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes.

In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.

Payment terms vary by the type and location of the customer and the products or services offered.

Generally, the time between when revenue is recognized and payment is due is not significant.

Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year.

Sales, value added, and other taxes collected concurrent with revenue are excluded from sales.

Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the Consolidated Balance Sheet.

The annual goodwill impairment test was performed using a qualitative analysis in 2018 and 2017 and a quantitative analysis in 2016.

Goodwill impairment testing was also performed using a quantitative analysis for the Electrical Products, Vehicle and eMobility segments in the first quarter of 2018 due to a reorganization of the Company's businesses resulting in the creation of the eMobility segment.

The Company used the relative fair value method to reallocate goodwill among these reporting units.

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.

February 28, 2018

| February 28, 2018 | | | | |

February 28, 2018

| February 28, 2018 | | | | |

*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.

*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.

*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.

| Cash received from (paid for) acquisitions of businesses, net of cash acquired | — | | | | 1 | | | | (72 | | ) |

*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.

| 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 | | |

*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.

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.

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.

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.

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.

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.

Warranty Accruals

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.

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.

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.

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.

ASU 2016-16 is effective for annual and interim periods beginning after December 15, 2017.

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.

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.