Eaton 10-Q 2021-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2021

Commission file number 000-54863

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange

Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

There were 398.6 million Ordinary Shares outstanding as of September 30, 2021.

PART I — FINANCIAL INFORMATION

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF INCOME

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

EATON CORPORATION plc

CONSOLIDATED BALANCE SHEETS

Showing the first 8K of 119K characters. Open the full section

Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).

COMPANY OVERVIEW

Eaton Corporation plc (Eaton or the Company) is a power management company with 2020 net sales of $17.9 billion. Eaton's mission is to improve the quality of life and environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic, and mechanical power - more safely, more efficiently and more reliably. Eaton has approximately 85,000 employees in 60 countries and sells products to customers in more than 175 countries.

Summary of Results of Operations

A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted follows:

In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions. Restructuring charges incurred for the three and nine months ended September 30, 2021 were $34 million and $63 million, respectively, and were $10 million and $197 million, respectively, for the three and nine months ended September 30, 2020. These restructuring activities are expected to incur additional expenses of $33 million in 2021, and $10 million in 2022, primarily comprised of plant closing and other costs, resulting in total estimated charges of $320 million for the entire program. The projected mature year savings from these restructuring actions are expected to be $230 million when fully implemented in 2023. Additional information related to this restructuring is presented in Note 14.

On February 25, 2020, Eaton acquired Power Distribution, Inc. a leading supplier of mission critical power distribution, static switching, and power monitoring equipment and services for data centers and industrial and commercial customers. The company is headquartered in Richmond, Virginia, and had 2019 sales of $125 million. Power Distribution, Inc. is reported within the Electrical Americas business segment.

On March 2, 2020, Eaton sold its Lighting business to Signify N.V. for a cash purchase price of $1.4 billion. As a result of the sale, the Company recognized a pre-tax gain of $221 million in 2020. The Lighting business, which had sales of $1.6 billion in 2019 as part of the Electrical Americas business segment, served customers in commercial, industrial, residential, and municipal markets.

On March 17, 2021, Eaton acquired Tripp Lite for $1.65 billion, net of cash received. Tripp Lite is a leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas. Tripp Lite had sales of over $400 million in 2020. Tripp Lite is reported within the Electrical Americas business segment.

On March 22, 2021, Eaton acquired Green Motion SA, a leading designer and manufacturer of electric vehicle charging hardware and related software based in Switzerland. Green Motion SA was acquired for $105 million, including $49 million of cash paid at closing and $56 million of estimated fair value of contingent future consideration based on 2023 and 2024 revenue performance, with a maximum possible undiscounted value of $109 million. Green Motion SA is reported within the Electrical Global business segment.

On March 29, 2021, Eaton acquired a 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region. HuanYu High Tech had 2019 sales of $106 million and has production operations in Wenzhou, China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.

On June 1, 2021, Eaton acquired Cobham Mission Systems (CMS) for $2.80 billion, net of cash received. CMS is a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. CMS had sales of over $700 million in 2020. CMS is reported within the Aerospace business segment.

On June 25, 2021, Eaton acquired a 50 percent stake in Jiangsu YiNeng Electric's busway business, which manufactures and markets busway products in China and had sales of $60 million in 2020. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.

On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S, a Danish industrial company. As a result of the sale, the Company received $3.1 billion, net of cash sold, and recognized a pre-tax gain of $617 million, subject to post-closing adjustments to be negotiated with Danfoss A/S. The Hydraulics business is a global leader in hydraulics components, systems, and services for industrial and mobile equipment. The business had sales of $1.8 billion in 2020.

COVID-19

The Company was impacted by the COVID-19 pandemic in select markets and industries. As a result, our businesses have been focused on cost control measures where appropriate to offset the volume declines we experienced in addition to executing on our multi-year restructuring program we decided to undertake in the second quarter of 2020. In the first nine months of 2021, the Company has seen broad-based strength in its end-markets and regions as our businesses have largely recovered from the negative impact of the COVID-19 pandemic. However as global economies recover, many of our businesses have been impacted by supply chain disruptions and inflation. Additionally, our Aerospace business segment continues to see some softness in demand due to the impact of continued travel restrictions on commercial aviation, particularly in international travel.

Eaton's products and support services are vital to hospitals, emergency services, military sites, utilities, public works, transportation, and shipping providers. In addition, data centers, retail outlets, airports, and governments, as well as the networks that support schools and remote workers, rely on the Company's products to serve their customers and communities. As a result, the Company's plants are generally not subject to extended shutdowns.

The Company continues to monitor the pandemic’s impact throughout the world, including guidance from governmental authorities and world health organizations. The Company’s actions to protect the safety and health of its workforce are aligned with its preventive health protocols and those of governmental authorities and health organizations including the Centers for Disease Controls (U.S.) and the World Health Organization.

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

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

Acquisition and Divestiture Charges and Income

Eaton incurs integration charges and transaction costs to acquire businesses, and transaction costs and other charges to divest and exit businesses. Eaton also recognizes gains and losses on the sale of businesses. A summary of these Corporate items follows:

Acquisition integration, divestiture charges and transaction costs in 2021 are primarily related to the divestiture of the Hydraulics business, the acquisitions of Tripp Lite, Cobham Mission Systems, Souriau-Sunbank Connection Technologies, and Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., and other charges to acquire and exit businesses including certain indemnity claims associated with the sale of 50% interest in the commercial vehicle automated transmission business in 2017. Charges in 2020 are primarily related to the divestitures of the Hydraulics business and the Lighting business, the acquisitions of Souriau-Sunbank and Ulusoy Elektrik, and other charges to exit businesses. These charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, Interest expense - net, or Other expense - net. In Business Segment Information in Note 15, the charges were included in Other income (expense) - net.

Intangible Asset Amortization Expense

Intangible asset amortization expense follows:

Consolidated Financial Results

Net Sales

Net sales increased 9% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 8% in organic sales, an increase of 7% from acquisitions of businesses, and an increase of 1% from the impact of positive currency translation, partially offset by a decrease of 7% from the divestiture of the Hydraulics business discussed in Note 2. The Company experienced constraints in its supply chain during the third quarter of 2021, which had a negative impact on Net sales. Despite these constraints, organic sales increased in the third quarter of 2021 primarily due to growth in the Electrical Global and Vehicle business segments. Net sales increased 13% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 11% in organic sales, an increase of 4% from acquisitions of businesses, and an increase of 2% from the impact of positive currency translation, partially offset by a decrease of 4% from the divestitures of the Hydraulics and Lighting businesses discussed in Note 2. The increase in organic sales in the first nine months of 2021 reflects broad-based strength in end-markets and regions as our business segments have largely recovered from the negative impact of the COVID-19 pandemic except for a decrease in the Aerospace business segment due to the continued impact of the pandemic on commercial aviation.

Gross Profit

Gross profit margin decreased from 32.6% in the third quarter of 2020 to 32.2% in the third quarter of 2021 primarily due to higher acquisition and divestiture costs, higher intangible asset amortization expense, and commodity and logistics inflation, partially offset by higher sales volumes in the Electrical Global and Vehicle business segments, the divestiture of the Hydraulics business, the acquisitions of Tripp Lite and Cobham Mission Systems, and savings from restructuring actions. Gross profit margin increased from 29.9% in first nine months of 2020 to 32.1% in first nine months of 2021 primarily due to higher sales volumes in the Electrical Americas, Electrical Global, and Vehicle business segments, the acquisitions of Tripp Lite and Cobham Mission Systems, and savings from restructuring actions, partially offset by lower organic sales volumes in the Aerospace business segment and commodity and logistics inflation.

Income Taxes

The effective income tax rate for the third quarter of 2021 was expense of 43.4% compared to expense of 14.8% for the third quarter of 2020. The effective income tax rate for the first nine months of 2021 was expense of 29.8% compared to expense of 21.3% for the first nine months of 2020. The increase in the effective tax rates in the third quarter and first nine months of 2021 was primarily due to the tax impact on the gain from the sale of the Hydraulics business in 2021 discussed in Note 2.

Net Income

Net income attributable to Eaton ordinary shareholders of $629 million in the third quarter of 2021 increased 41% compared to Net income attributable to Eaton ordinary shareholders of $446 million in the third quarter of 2020. Net income in the third quarter of 2021 included an after-tax gain of $197 million on the sale of the Hydraulics business. Excluding this gain, the decrease in the third quarter of 2021 was primarily due to higher acquisition and divestiture charges, partially offset by higher gross profit. Net income attributable to Eaton ordinary shareholders of $1,593 million in the first nine months of 2021 increased 70% compared to Net income attributable to Eaton ordinary shareholders of $935 million in the first nine months of 2020. Net income in the first nine months of 2021 and 2020 included after-tax gains of $197 million on the sale of the Hydraulics business and $91 million on the sale of the Lighting business, respectively. Excluding these gains, the increase in the first nine months of 2021 was primarily due to higher gross profit and lower restructuring program charges, partially offset by higher acquisition and divestiture charges and higher intangible asset amortization expense.

Net income per ordinary share increased to $1.57 in the third quarter of 2021 compared to $1.11 in the third quarter of 2020. Net income per ordinary share in 2021 included $0.49 from the sale of the Hydraulics business. Excluding this gain, the decrease in Net income per ordinary share in the third quarter of 2021 was due to lower Net income attributable to Eaton ordinary shareholders. Net income per ordinary share increased to $3.97 in the first nine months of 2021compared to $2.31 in the first nine months of 2020. Net income per ordinary share in the first nine months of 2021 and 2020 included $0.49 and $0.22 from the sale of the Hydraulics and Lighting businesses, respectively. Excluding these gains, the increase in Net income per ordinary share in the first nine months of 2021 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past year.

Adjusted Earnings

Adjusted earnings of $701 million in the third quarter of 2021 increased 29% compared to Adjusted earnings of $544 million in the third quarter of 2020. Adjusted earnings of $1,968 million in the first nine months of 2021 increased 40% compared to Adjusted earnings of $1,404 million in the first nine months of 2020. The increase in Adjusted earnings in the third quarter and first nine months of 2021 was primarily due to higher Net income attributable to Eaton ordinary shareholders, adjusted for acquisition and divestiture charges (income), restructuring program charges, and intangible asset amortization expense.

Adjusted earnings per ordinary share increased to $1.75 in the third quarter of 2021 compared to $1.35 in the third quarter of 2020. Adjusted earnings per ordinary share increased to $4.91 in the first nine months of 2021 compared to $3.47 in the first nine months of 2020. The increase in Adjusted earnings per ordinary share in the third quarter and first nine months of 2021 was due to higher Adjusted earnings and the impact of the Company's share repurchases over the past year.

Business Segment Results of Operations

The following is a discussion of Net sales, operating profit and operating margin by business segment.

Electrical Americas

Net sales increased 9% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 8% from the acquisition of Tripp Lite and an increase of 1% in organic sales. The Electrical Americas business segment experienced constraints in its supply chain during the third quarter of 2021, which had a negative impact on Net sales. Despite these constraints, organic sales increased in the third quarter of 2021 primarily due to strength in data center and residential end-markets, partially offset by weakness in large industrial projects and sales to utilities. Net sales increased 7% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 6% from the acquisitions of Tripp Lite and Power Distribution, Inc., an increase of 5% in organic sales, and an increase of 1% from the impact of positive currency translation, partially offset by a decrease of 5% from the divestiture of the Lighting business. The increase in organic sales in the first nine months of 2021 was primarily due to broad-based strength in end-markets as they have largely recovered from the COVID-19 pandemic, except for weakness in large industrial projects.

The operating margin decreased from 22.2% in the third quarter of 2020 to 21.7% in the third quarter of 2021 primarily due to commodity and logistics inflation, partially offset by the acquisition of Tripp Lite, higher organic sales volumes, and savings from restructuring actions. The operating margin increased from 20.0% in the first nine months of 2020 to 21.2% in the first nine months of 2021 primarily due to higher organic sales volumes, the acquisition of Tripp Lite, the favorable impact of the divestiture of the Lighting business, and savings from restructuring actions, partially offset by commodity and logistics inflation.

Electrical Global

Net sales increased 19% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 18% in organic sales and an increase of 1% from the impact of positive currency translation. Net sales increased 19% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 15% in organic sales and an increase of 4% from the impact of positive currency translation. The increase in organic sales in the third quarter and first nine months of 2021 was primarily due to broad-based strength in end-markets as they have largely recovered from the COVID-19 pandemic.

The operating margin increased from 16.6% in the third quarter of 2020 to 20.1% in the third quarter of 2021 and from 15.7% in the first nine months of 2020 to 18.5% in the first nine months of 2021 primarily due to higher sales volumes, and savings from restructuring actions and other costs control measures, partially offset by commodity and logistics inflation.

Hydraulics

On August 2, 2021, Eaton completed the sale of the Hydraulics business segment. As a result, net sales and operating profit for the third quarter and first nine months of 2021 are not directly comparable to the third quarter and first nine months of 2020, since 2021 only includes the results of the Hydraulics business through the date of the sale.

Aerospace

Net sales increased 38% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 33% from the acquisition of Cobham Mission Systems, an increase of 4% in organic sales, and an increase of 1% from the impact of positive currency translation. The increase in organic sales in the third quarter of 2021 was primarily due to higher sales in commercial markets, partially offset by weakness in military markets. Net sales increased 12% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 15% from the acquisition of Cobham Mission Systems and an increase of 2% from the impact of positive currency translation, partially offset by a decrease of 5% in organic sales. The decrease in organic sales in the first nine months of 2021 was primarily due to the impact of continued travel restrictions from the COVID-19 pandemic on commercial aviation.

The operating margin increased from 18.5% in the third quarter of 2020 to 22.0% in third quarter of 2021 primarily due to the acquisition of Cobham Mission Systems, higher sales volumes, and savings from restructuring actions. The operating margin increased from 18.7% in the first nine months of 2020 to 20.7% in the first nine months of 2021 primarily due to savings from restructuring actions and the acquisition of Cobham Mission Systems, partially offset by lower organic sales volumes.

Vehicle

Net sales increased 12% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 11% in organic sales and an increase of 1% from the impact of positive currency translation. The Vehicle business segment's organic sales were negatively impacted in the third quarter of 2021 as a result of its customers experiencing supply chain constraints leading to reduced production levels and historic low vehicle inventory. Despite these challenges, organic sales increased in the third quarter of 2021 primarily due to strength in the North American Class 8 truck market and the South American light vehicle market, partially offset by weakness in the North American light vehicle market. Net sales increased 31% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 30% in organic sales and an increase of 1% from the impact of positive currency translation. The increase in organic sales in the first nine months of 2021 was primarily due to strength in all regions compared to 2020 which was significantly impacted by plant shutdowns due to the COVID-19 pandemic.

The operating margin increased from 14.0% in the third quarter of 2020 to 18.0% in the third quarter of 2021 primarily due to higher sales volumes, favorable product mix, and savings from restructuring actions, partially offset by commodity and logistics inflation. The operating margin increased from 9.3% in the first nine months of 2020 to 17.7% in the first nine months of 2021 primarily due to higher sales volumes and savings from restructuring actions, partially offset by commodity and logistics inflation.

eMobility

Net sales increased 6% in the third quarter of 2021 compared to the third quarter of 2020 due to an increase of 6% in organic sales. The eMobility business segment's organic sales were negatively impacted in the third quarter of 2021 as a result of its customers experiencing supply chain constraints leading to reduced production levels. Despite these challenges, organic sales increased in the third quarter of 2021 primarily due to strength in North American and Asia Pacific regions, partially offset by weakness in Europe. Net sales increased 23% in the first nine months of 2021 compared to the first nine months of 2020 due to an increase of 21% in organic sales and an increase of 2% from the impact of positive currency translation. The increase in organic sales in the first nine months of 2021 was primarily due to strength in North American and Asia Pacific regions compared to 2020 which was significantly impacted by plant shutdowns due to the COVID-19 pandemic.

The operating margin decreased from negative 2.5% in the third quarter of 2020 to negative 9.5% in the third quarter of 2021 and from negative 1.4% in the first nine months of 2020 to negative 8.2% in the first nine months of 2021 primarily due to increased research and development costs and manufacturing start-up costs associated with new electric vehicle programs, and commodity and logistics inflation, partially offset by higher sales volumes.

Corporate Expense (Income)

Total corporate income was $135 million in the third quarter of 2021 compared to Total corporate expense of $271 million in the third quarter of 2020. The change in Total corporate (income) expense for the third quarter of 2021 was primarily due to the change in Other (income) expense - net and the favorable impact of the freeze on the Company's United States pension plans discussed in Note 8, partially offset by higher Intangible asset amortization expense, and higher Restructuring program charges discussed in Note 14. The change in Other (income) expense - net is primarily due to the 2021 gain on sale of the Hydraulics business discussed in Note 2, partially offset by higher acquisition and divestiture charges.

Total corporate expense was $509 million in the first nine months of 2021 compared to Total corporate expense of $929 million in the first nine months of 2020. The decrease in Total corporate expense for the first nine months of 2021 was primarily due to lower Other expense - net, lower Restructuring program charges, and the favorable impact of the freeze on the Company's United States pension plans, partially offset by higher Intangible asset amortization expense. The decrease in Other expense - net is primarily due to the 2021 gain on sale of the Hydraulics business compared to the 2020 gain on the sale of the Lighting business, partially offset by higher acquisition and divestiture charges.

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.

On March 8, 2021, a subsidiary of Eaton issued Euro denominated notes (2021 Euro Notes) with a face value of €1,500 million ($1,798 million), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2021 Euro Notes are comprised of two tranches of €900 million and €600 million, which mature in 2026 and 2030, respectively, with interest payable annually at a respective rate of 0.128% and 0.577%. The issuer received proceeds totaling €1,494 million ($1,790 million) from the issuance, net of financing costs and discounts.

On May 17, 2021, the Company entered into a $2,500 million 364-day revolving credit facility, which brought the Company’s total revolving credit facilities to $4,500 million. At June 30, 2021, the Company had access to the commercial paper markets through its $4,500 million commercial paper program, of which $3,372 million was outstanding including funds to finance the acquisition of Cobham Mission Systems discussed in Note 2. Eaton used the proceeds from the sale of the Hydraulics business, which was completed August 2, 2021, to reduce its outstanding commercial paper borrowings.

On September 22, 2021, the Company downsized the 364-day revolving credit facility from $2,500 million to $500 million, which reduced the Company's total revolving credit facilities to $2,500 million. In September 2021, the Company also downsized its commercial paper program to $2,500 million. There were no borrowings outstanding under Eaton’s revolving credit facilities at September 30, 2021. The Company had access to the commercial paper markets through its $2,500 million commercial paper program, of which $421 million was outstanding on September 30, 2021.

On October 4, 2021, the Company replaced its existing $500 million 364-day revolving credit facility, $750 million five-year revolving credit facility, $500 million four-year revolving credit facility, and $750 million five-year revolving credit facility, with a new $500 million 364-day revolving credit facility and a new $2,000 million five-year revolving credit facility that will expire on October 4, 2026. The revolving credit facilities totaling $2,500 million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. The Company maintains access to the commercial paper markets through its $2,500 million commercial paper program.

Eaton completed the $1.4 billion sale of its Lighting business on March 2, 2020, the acquisitions of Tripp Lite for $1.65 billion on March 17, 2021 and Cobham Mission Systems for $2.80 billion on June 1, 2021, and the $3.1 billion sale of its Hydraulics business on August 2, 2021. 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, availability under existing revolving credit facilities, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business, fund acquisitions of businesses, as well as scheduled payments of long-term debt.

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

Sources and Uses of Cash

Operating Cash Flow

Net cash provided by operating activities was $1,368 million in the first nine months of 2021, a decrease of $633 million compared to $2,001 million in the first nine months of 2020. The decrease in net cash provided by operating activities in the first nine months of 2021 was primarily due to higher working capital balances to support the Company’s organic growth as our business segments have largely recovered from the negative impact of the COVID-19 pandemic, taxes paid on the sale of the Hydraulics business, and a pension contribution to Eaton's U.S. qualified pension plan in 2021.

Investing Cash Flow

Net cash used in investing activities was $1,688 million in the first nine months of 2021, an increase of $2,397 million in the use of cash compared to net cash provided by investing activities of $709 million in the first nine months of 2020. The increase in the use of cash was primarily driven by cash paid for business acquisitions discussed in Note 2, partially offset by proceeds received in 2021 from the sale of the Hydraulics business of $3,110 million compared to proceeds received in 2020 from the sale of the Lighting business of $1,408 million, and net sales of short-term investments of $264 million in 2021 compared to net purchases of $121 million in 2020.

Financing Cash Flow

Net cash provided by financing activities was $166 million in the first nine months of 2021, an increase of $2,785 million in the source of cash compared to net cash used in financing activities of $2,619 million in the first nine months of 2020. The increase in the source of cash was primarily due to higher proceeds from borrowings of $1,798 million in 2021 compared to no proceeds from borrowings in 2020, lower share repurchases of $122 million in 2021 compared to $1,464 million in 2020, and net proceeds of short-term debt of $430 million in 2021 compared to net payments of $253 million in 2020, partially offset by higher payments on borrowings of $1,011 million in 2021 compared to $7 million in 2020.

Guaranteed Debt

Issuers, Guarantors and Guarantor Structure

Eaton Corporation has issued senior notes pursuant to indentures dated April 1, 1994 (the 1994 Indenture), November 20, 2012 (the 2012 Indenture) and September 15, 2017 (the 2017 Indenture). The senior notes of Eaton Corporation are registered under the Securities Act of 1933, as amended (the Registered Senior Notes). Eaton Corporation is also the issuer of one outstanding series of privately placed debt securities (the PPNs), and Eaton Capital Unlimited Company, another subsidiary of Eaton, is the issuer of four outstanding series of debt securities sold in offshore transactions under Regulation S promulgated under the Securities Act (the Eurobonds). The PPNs, the Eurobonds and the Registered Senior Notes (together, the Senior Notes) comprise substantially all of Eaton’s long-term indebtedness.

Substantially all of the Senior Notes, together with the credit facilities described above under Financial Condition and Liquidity (the Credit Facilities), are guaranteed by Eaton and 18 of its subsidiaries. Accordingly, they rank equally with each other. However, because these obligations are not secured, they would be effectively subordinated to any existing or future secured indebtedness of Eaton and its subsidiaries. As of September 30, 2021, Eaton has no material, long-term secured debt. The guaranteed Registered Senior Notes are also structurally subordinated to the liabilities of Eaton's subsidiaries that are not guarantors. Except as described below under Future Guarantors, Eaton is not obligated to cause its subsidiaries to guarantee the Registered Senior Notes.

The table set forth in Exhibit 22 filed with the Form 10-K filed on February 24, 2021, details the primary obligors and guarantors with respect to the guaranteed Registered Senior Notes.

Terms of Guarantees of Registered Securities

Payment of principal and interest on the Registered Senior Notes is guaranteed, on an unsecured, unsubordinated basis by the subsidiaries of Eaton set forth in the table referenced in Exhibit 22. Each guarantee is full and unconditional, and joint and several. Each guarantor's guarantee is an unsecured obligation that ranks equally with all its other unsecured and unsubordinated indebtedness. The obligations of each guarantor under its guarantee of the Registered Senior Notes is subject to a customary savings clause or similar provision designed to prevent such guarantee from constituting a fraudulent conveyance or otherwise legally impermissible or voidable obligation.

Generally, each guarantee of the Registered Senior Notes by a guarantor other than Eaton provides that it will be automatically and unconditionally released and discharged upon:

(a)the consummation of any transaction permitted under the applicable indenture resulting in such guarantor ceasing to be a subsidiary, such as a sale to a third party;

(b)such guarantee (so long as the guarantor is not obligated under any other U.S. debt obligations), becoming prohibited by any applicable law, rule or regulation or by any contractual obligation;

(c)such guarantee resulting in material adverse tax consequences to Eaton or any of its subsidiaries (so long as the applicable guarantor is not obligated under any other U.S. debt obligation); or

(d)such guarantor becoming a controlled foreign corporation within the meaning Section 957(a) of the Internal Revenue Code (a CFC), or an entity the material assets of which is limited to equity interests of a CFC.

Notwithstanding the foregoing, each guarantee by a direct or indirect parent of Eaton Corporation (other than Eaton) provides that it will be released only under the circumstances described in subparagraphs (b) and (c) above.

The guarantee of Eaton does not contain any release provisions.

Future Guarantors

The 2012 and 2017 Indentures generally provide that, with certain limited exceptions, any subsidiary of Eaton must become a guarantor if it becomes obligated as borrower or guarantor under any series of debt securities or a syndicated credit facility. Further, any entity that becomes a direct or indirect parent entity of Eaton Corporation and holds any material assets, with certain limited exceptions, or owes any material liabilities must become a guarantor.

The 1994 Indenture does not contain provisions with respect to future guarantors.

Summarized Financial Information of Guarantors and Issuers

The financial information presented is that of Eaton Corporation and the Guarantors, which includes Eaton Corporation plc, on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions between Eaton Corporation and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately.

FORWARD-LOOKING STATEMENTS

This Form 10-Q Report contains forward-looking statements concerning anticipated additional charges and projected savings from restructuring actions, the future impact of COVID-19, the performance of our end markets, tax controversies and legal contingencies, among other matters. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the potential effects on our businesses from natural disasters; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; war, civil or political unrest or terrorism; the course of the COVID-19 pandemic and government responses thereto, 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.

There have been no material changes in exposures to market risk since December 31, 2020.

Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Craig Arnold - Principal Executive Officer; and Thomas B. Okray - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of September 30, 2021.

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

During the third quarter of 2021, there was no change in Eaton’s internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting. Management is currently evaluating the impact of businesses acquired in the past twelve months on Eaton's internal control over financial reporting.

PART II — OTHER INFORMATION

**ITEM 1.**LEGAL PROCEEDINGS.

Information regarding the Company's current legal proceedings is presented in Notes 9 and 10 of the Notes to the condensed consolidated financial statements.

“Item 1A. Risk Factors” in Eaton's 2020 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 2020 Form 10-K.

**ITEM 2.**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

(c) Issuer's Purchases of Equity Securities

During the third quarter of 2021, 0.3 million ordinary shares were repurchased in the open market at a total cost of $46 million. These shares were repurchased under the program approved by the Board on February 27, 2019 (the 2019 Program). A summary of the shares repurchased in the third quarter of 2021 follows:

Eaton Corporation plc

Third Quarter 2021 Report on Form 10-Q