Item 1. FINANCIAL STATEMENTS.

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Item 1. FINANCIAL STATEMENTS.

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF INCOME


	Three months ended March 31
(In millions except for per share data)		2022		2021
Net sales		$	4,843	$	4,692

Cost of products sold		3,269		3,184
Selling and administrative expense		790		795

Research and development expense		165		148
Interest expense - net		32		38
Gain on sale of business		24		—


Other income - net		(8)		(11)
Income before income taxes		619		538
Income tax expense		86		79
Net income		533		459
Less net income for noncontrolling interests		(1)		(1)
Net income attributable to Eaton ordinary shareholders		$	532	$	458

Net income per share attributable to Eaton ordinary shareholders
Diluted		$	1.33	$	1.14
Basic		1.33		1.15

Weighted-average number of ordinary shares outstanding
Diluted		401.8		400.9
Basic		399.2		398.3

Cash dividends declared per ordinary share		$	0.81	$	0.76

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three months ended March 31
(In millions)		2022		2021
Net income		$	533	$	459
Less net income for noncontrolling interests		(1)		(1)
Net income attributable to Eaton ordinary shareholders		532		458

Other comprehensive income (loss), net of tax
Currency translation and related hedging instruments		(62)		(172)
Pensions and other postretirement benefits		77		47
Cash flow hedges		101		95


Other comprehensive income (loss) attributable to Eaton ordinary shareholders		116		(30)

Total comprehensive income attributable to Eaton ordinary shareholders		$	648	$	428

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

EATON CORPORATION plc

CONSOLIDATED BALANCE SHEETS


(In millions)	March 31, 2022		December 31, 2021
Assets
Current assets
Cash	$	237	$	297
Short-term investments	268		271
Accounts receivable - net	3,667		3,297
Inventory	3,317		2,969

Prepaid expenses and other current assets	705		677
Total current assets	8,194		7,511

Property, plant and equipment
Land and buildings	2,245		2,227
Machinery and equipment	5,685		5,591
Gross property, plant and equipment	7,930		7,818
Accumulated depreciation	(4,832)		(4,754)
Net property, plant and equipment	3,098		3,064

Other noncurrent assets
Goodwill	14,955		14,751
Other intangible assets	6,012		5,855

Operating lease assets	449		442
Deferred income taxes	388		392
Other assets	2,112		2,012
Total assets	$	35,208	$	34,027

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	1,116	$	13
Current portion of long-term debt	1,728		1,735
Accounts payable	2,867		2,797
Accrued compensation	331		501

Other current liabilities	2,214		2,166
Total current liabilities	8,256		7,212

Noncurrent liabilities
Long-term debt	6,763		6,831
Pension liabilities	831		872
Other postretirement benefits liabilities	260		263
Operating lease liabilities	342		337
Deferred income taxes	635		559
Other noncurrent liabilities	1,465		1,502
Total noncurrent liabilities	10,296		10,364

Shareholders’ equity
Ordinary shares (399.0 million outstanding in 2022 and 398.8 million in 2021)	4		4
Capital in excess of par value	12,427		12,449
Retained earnings	7,707		7,594
Accumulated other comprehensive loss	(3,517)		(3,633)
Shares held in trust	(1)		(1)
Total Eaton shareholders’ equity	16,620		16,413
Noncontrolling interests	36		38
Total equity	16,656		16,451
Total liabilities and equity	$	35,208	$	34,027

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

EATON CORPORATION plc

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three months ended March 31
(In millions)	2022		2021
Operating activities
Net income	$	533	$	459
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	244		208
Deferred income taxes	15		(39)
Pension and other postretirement benefits expense	6		14
Contributions to pension plans	(32)		(243)
Contributions to other postretirement benefits plans	(6)		(6)

Gain on sale of business	(24)		—
Changes in working capital	(785)		(108)
Other - net	91		(25)
Net cash provided by operating activities	42		260

Investing activities
Capital expenditures for property, plant and equipment	(115)		(119)
Cash paid for acquisitions of businesses, net of cash acquired	(612)		(1,700)

Investments in associate companies	(17)		(80)
Purchases of short-term investments - net	(1)		(280)
Payments for settlement of currency exchange contracts not designated as hedges - net	—		(17)
Other - net	(17)		(5)
Net cash used in investing activities	(762)		(2,201)

Financing activities
Proceeds from borrowings	—		1,798
Payments on borrowings	(4)		(3)
Short-term debt, net	1,105		463

Cash dividends paid	(320)		(300)
Exercise of employee stock options	8		21
Repurchase of shares	(86)		(59)

Employee taxes paid from shares withheld	(50)		(37)
Other - net	(1)		(8)
Net cash provided by financing activities	652		1,875

Effect of currency on cash	8		(11)
Less: Increase in cash classified as held for sale	—		(7)
Decrease in cash	(60)		(84)
Cash at the beginning of the period	297		438
Cash at the end of the period	$	237	$	354

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

EATON CORPORATION plc

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

**Note 1.**BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.

This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2021 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.

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

**Note 2.**ACQUISITIONS AND DIVESTITURE OF BUSINESSES

Acquisition of Tripp Lite

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

The acquisition of Tripp Lite has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. During the measurement period which ended in March 2022, opening balance sheet adjustments were made to finalize Eaton's fair value estimates based on the final valuations received, which are summarized in the table below. The measurement period adjustments did not have a material impact to the Consolidated Statements of Income.


(In millions)	Preliminary Allocation		Measurement Period Adjustments		Final Allocation

Short-term investments	$	5	$	—	$	5
Accounts receivable	94		(1)		93
Inventory	184		(5)		179
Prepaid expenses and other current assets	6		(1)		5
Property, plant and equipment	6		(5)		1
Other intangible assets	630		(26)		604
Other assets	—		2		2
Accounts payable	(13)		—		(13)
Other current liabilities	(32)		(2)		(34)
Other noncurrent liabilities	(157)		(10)		(167)
Total identifiable net assets	723		(48)		675

Goodwill	928		48		976
Total consideration, net of cash received	$	1,651	$	—	$	1,651

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Tripp Lite. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. The estimated fair values of the customer relationships, trademarks and technology intangible assets of $539 million, $33 million and $32 million, respectively, were determined using either the relief-from-royalty model or the multi-period excess earnings model, which are discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. The estimated useful lives for customer relationships, trademarks and technology intangible assets were 20 years, 15 years, and 5 years, respectively. See Note 6 for additional information about goodwill.

Eaton's 2021 Condensed Consolidated Financial Statements include Tripp Lite’s results of operations, including sales of $26 million, from the date of acquisition through March 31, 2021.

Acquisition of Mission Systems

On June 1, 2021, Eaton acquired Mission Systems for $2.80 billion, net of cash received. Mission Systems is a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. Mission Systems is reported within the Aerospace business segment.

The acquisition of Mission Systems has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. There has not been a material change from the estimated fair values of the assets acquired and liabilities assumed presented in Note 2 to the Consolidated Financial Statements in the 2021 Form 10-K. Draft third-party valuations for Other intangible assets and Property, plant and equipment have been received. These preliminary estimates will be finalized in the second quarter of 2022 when our review of the third-party valuations are completed, further information becomes available and additional analyses are performed, and these differences could have a material impact on Eaton's preliminary purchase price allocation.

Sale of Hydraulics business

On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S. As a result of the sale, the Company received $3.1 billion, net of cash sold, and recognized a pre-tax gain of $617 million in 2021. According to the terms of the sales agreement, the Company finalized negotiations of post-closing adjustments with Danfoss A/S during the first quarter of 2022. As a result of these negotiations, the Company recognized an additional pre-tax gain of $24 million. The business had sales of $1.3 billion in 2021 through the date of the sale.

Acquisition of Royal Power Solutions

On January 5, 2022, Eaton acquired Royal Power Solutions for $612 million, net of cash received. Royal Power Solutions is a U.S. based manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets. Royal Power Solutions is reported within the eMobility business segment.

The acquisition of Royal Power Solutions has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed on the acquisition date. These preliminary estimates will continue to be revised during the measurement period as third-party valuations are received and finalized, further information becomes available and additional analyses are performed, and these differences could have a material impact on Eaton's preliminary purchase price allocation.


(In millions)	January 5, 2022


Accounts receivable	$	36
Inventory	43
Prepaid expenses and other current assets	1
Property, plant and equipment	25
Other intangible assets	306
Other assets	21
Accounts payable	(24)
Other current liabilities	(10)
Other noncurrent liabilities	(70)
Total identifiable net assets	328
Goodwill	284
Total consideration, net of cash received	$	612

Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the anticipated synergies of acquiring Royal Power Solutions. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. Other intangible assets of $306 million are expected to include customer relationships, trademarks and technology. Given the timing of the acquisition, Eaton utilized a benchmarking approach based on similar acquisitions to determine the preliminary fair values for intangible assets. See Note 6 for additional information about goodwill.

Eaton's 2022 Condensed Consolidated Financial Statements include Royal Power Solutions' results of operations, including segment operating profit of $5 million on sales of $38 million, from the date of acquisition through March 31, 2022.

Note 3. REVENUE RECOGNITION

Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.

The following table provides disaggregated sales by lines of businesses, geographic destination, market channel or end market, as applicable, for the Company's operating segments:


	Three months ended March 31
(In millions)		2022		2021
Electrical Americas
Products		$	603	$	520
Systems		1,288		1,102
Total		$	1,891	$	1,622

Electrical Global
Products		$	876	$	713
Systems		561		540
Total		$	1,437	$	1,253

Hydraulics
United States		$	—	$	222
Rest of World		—		339
Total		$	—	$	561

Aerospace
Original Equipment Manufacturers		$	293	$	208
Aftermarket		221		146
Industrial and Other		204		165
Total		$	718	$	519

Vehicle
Commercial		$	402	$	342
Passenger and Light Duty		269		312
Total		$	671	$	654

eMobility		$	126	$	83

Total net sales		$	4,843	$	4,692

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of revenue recognized). Accounts receivable from customers were $3,216 million and $2,896 million at March 31, 2022 and December 31, 2021, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $194 million and $187 million at March 31, 2022 and December 31, 2021, respectively, and are recorded in Prepaid expenses and other current assets. The increase in unbilled receivables reflects higher revenue recognized from increased business activity in 2022.

Changes in the deferred revenue liabilities are as follows:


(In millions)	Deferred Revenue
Balance at January 1, 2022	$	422
Customer deposits and billings	342
Revenue recognized in the period	(334)

Translation	(2)

Balance at March 31, 2022	$	428


(In millions)	Deferred Revenue
Balance at January 1, 2021	$	257
Customer deposits and billings	276
Revenue recognized in the period	(262)
Translation and other	(3)

Balance at March 31, 2021	$	268

Deferred revenue liabilities of $401 million and $395 million as of March 31, 2022 and December 31, 2021, respectively, were included in Other current liabilities with the remaining balance presented in Other noncurrent liabilities.

A significant portion of open orders placed with Eaton are by original equipment manufacturers or distributors. These open orders are not considered firm as they have been historically subject to releases by customers. In measuring backlog of unsatisfied or partially satisfied obligations, only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at March 31, 2022 was approximately $9.3 billion. At March 31, 2022, approximately 87% of this backlog is targeted for delivery to customers in the next twelve months and the rest thereafter.

Note 4. CREDIT LOSSES FOR RECEIVABLES

Receivables are exposed to credit risk based on the customers’ ability to pay which is influenced by, among other factors, their financial liquidity position. Eaton’s receivables are generally short-term in nature with a majority outstanding less than 90 days.

Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its receivables based on the length of time the receivable is past due, and any anticipated future write-off based on historic experience adjusted for market conditions. The Company's segments, supported by our global credit department, perform the credit evaluation and monitoring process to estimate and manage credit risk. The process includes an evaluation of credit losses for both the overall segment receivable and specific customer balances. The process also includes review of customer financial information and credit ratings, approval and monitoring of customer credit limits, and an assessment of market conditions. The Company may also require prepayment from customers to mitigate credit risk. Receivable balances are written off against an allowance for credit losses after a final determination of collectability has been made.

Accounts receivable are net of an allowance for credit losses of $42 million at March 31, 2022 and December 31, 2021. The change in the allowance for credit losses includes expense and net write-offs, none of which are significant.

Note 5. INVENTORY

Inventory is carried at lower of cost or net realizable value. The components of inventory are as follows:


(In millions)	March 31, 2022		December 31, 2021
Raw materials	$	1,219	$	1,096
Work-in-process	783		620
Finished goods	1,315		1,253
Total inventory	$	3,317	$	2,969

Note 6. GOODWILL

Changes in the carrying amount of goodwill by segment are as follows:


(In millions)	January 1, 2022		Additions		Translation		March 31, 2022
Electrical Americas	$	7,417	$	5	$	6	$	7,428
Electrical Global	4,183		2		(65)		4,120

Aerospace	2,781		8		(36)		2,753
Vehicle	290		—		—		290
eMobility	80		284		—		364
Total	$	14,751	$	299	$	(95)	$	14,955

The 2022 additions to goodwill relate primarily to the anticipated synergies of acquiring Royal Power Solutions. The allocation of the purchase price from this acquisition is preliminary and will be completed during the measurement period.

Note 7. RETIREMENT BENEFITS PLANS

The components of retirement benefits expense (income) are as follows:















	United States pension benefit expense (income)				Non-United States pension benefit expense (income)				Other postretirement benefits expense (income)
	Three months ended March 31
(In millions)	2022		2021		2022		2021		2022		2021
Service cost	$	8	$	10	$	16	$	19	$	—	$	—
Interest cost	20		17		12		10		2		2
Expected return on plan assets	(53)		(56)		(31)		(30)		—		—
Amortization	8		10		12		19		(2)		(1)
	(17)		(19)		9		18		—		1

Settlements	14		14		—		—		—		—
Total expense (income)	$	(3)	$	(5)	$	9	$	18	$	—	$	1

During 2020, the Company announced it was freezing its United States pension plans for its non-union employees. The freeze was effective January 1, 2021 for non-union U.S. employees whose retirement benefit was determined under a cash balance formula and is effective January 1, 2026 for non-union U.S. employees whose retirement benefit is determined under a final average pay formula.

During the first quarter of 2022, the Company recognized settlement losses from lump-sum distributions of $14 million, and remeasured certain pension plans as a result of lump-sum distributions exceeding or expected to exceed the sum of service and interest costs for the year. These remeasurements resulted in increases of $32 million in pension assets, decreases of $15 million in pension liabilities, and decreases of $47 million in other comprehensive loss.

The components of retirement benefits expense (income) other than service costs are included in Other income - net.

Note 8. LEGAL CONTINGENCIES

Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations and indemnity claims, tax audits, patent infringement, personal injuries, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the Condensed Consolidated Financial Statements.

Note 9. INCOME TAXES

The effective income tax rate for the first quarter of 2022 was expense of 13.9% compared to expense of 14.7% for the first quarter of 2021. The decrease in the effective tax rate in the first quarter of 2022 was primarily due to the excess tax benefits recognized for employee share-based payments in the first quarter of 2022.

Brazil Tax Years 2005-2012

The Company has two Brazilian tax cases primarily relating to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. One case involves tax years 2005-2008 (Case 1), and the other involves tax years 2009-2012 (Case 2). Case 2 is proceeding on a more accelerated timeline than Case 1. For Case 2, the Company received a tax assessment in 2014 that included interest and penalties. In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $29 million plus $107 million of interest and penalties (translated at the March 31, 2022 exchange rate). The Company is challenging this assessment in the judicial system and, on April 18, 2022, received an unfavorable decision at the first judicial level. On April 27, 2022, the Company filed a motion for clarification relating to that decision, which is currently pending with the court. The Company intends to continue its challenge of this assessment in the judicial system, including appealing the April 18, 2022 decision, if necessary.

As previously disclosed for Case 1, the Company received a separate tax assessment alleging a tax deficiency of $35 million plus $115 million of interest and penalties (translated at the March 31, 2022 exchange rate), which the Company is challenging in the judicial system. This case is still pending resolution at the first judicial level.

Both cases are expected to take several years to resolve through the Brazilian judicial system and require provision of certain assets as security for the alleged deficiencies. As of March 31, 2022, the Company pledged Brazilian real estate assets with net book value of $22 million and provided additional security in the form of bank secured bonds totaling $113 million and a cash deposit of $20 million (translated at the March 31, 2022 exchange rate).

The Company believes that the final resolution of both of the assessments will not have a material impact on its condensed consolidated financial statements. The ultimate outcome of these matters cannot be predicted with certainty given the complex nature of tax controversies. Should the ultimate outcome of these matters deviate from our reasonable expectations, they may have a material adverse impact on the Company’s condensed consolidated financial statements. However, Eaton believes that its interpretations of tax laws and application of tax laws to its facts are correct.

Note 10. EQUITY

On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $5.0 billion of ordinary shares (2019 Program). On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $5.0 billion in repurchases to be made during the three-year period commencing on that date (2022 Program). Under the 2022 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During the three months ended March 31, 2022, 0.6 million ordinary shares were repurchased under the 2022 program in the open market at a total cost of $86 million. During the three months ended March 31, 2021, 0.5 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $59 million.

The changes in Shareholders’ equity are as follows:


	Ordinary shares			Capital in excess of par value		Retained earnings		Accumulated other comprehensive loss		Shares held in trust		Total Eaton shareholders' equity		Noncontrolling interests		Total equity

(In millions)	Shares	Dollars
Balance at January 1, 2022	398.8	$	4	$	12,449	$	7,594	$	(3,633)	$	(1)	$	16,413	$	38	$	16,451


Net income	—	—		—		532		—		—		532		1		533
Other comprehensive income, net of tax								116				116		—		116
Cash dividends paid and accrued	—	—		—		(331)		—		—		(331)		(2)		(333)

Issuance of shares under equity-based compensation plans	0.8	—		(22)		(2)		—		—		(24)		—		(24)

Changes in noncontrolling interest of consolidated subsidiaries - net	—	—		—		—		—		—		—		(1)		(1)


Repurchase of shares	(0.6)	—		—		(86)		—		—		(86)		—		(86)
Balance at March 31, 2022	399.0	$	4	$	12,427	$	7,707	$	(3,517)	$	(1)	$	16,620	$	36	$	16,656


	Ordinary shares			Capital in excess of par value		Retained earnings		Accumulated other comprehensive loss		Shares held in trust		Total Eaton shareholders' equity		Noncontrolling interests		Total equity

(In millions)	Shares	Dollars
Balance at January 1, 2021	398.1	$	4	$	12,329	$	6,794	$	(4,195)	$	(2)	$	14,930	$	43	$	14,973


Net income	—	—		—		458		—		—		458		1		459
Other comprehensive loss, net of tax								(30)				(30)		—		(30)
Cash dividends paid and accrued	—	—		—		(309)		—		—		(309)		—		(309)

Issuance of shares under equity-based compensation plans	0.9	—		6		(1)		—		—		5		—		5

Changes in noncontrolling interest of consolidated subsidiaries - net	—	—		—		—		—		—		—		(2)		(2)


Repurchase of shares	(0.5)	—		—		(59)		—		—		(59)		—		(59)
Balance at March 31, 2021	398.5	$	4	$	12,335	$	6,883	$	(4,225)	$	(2)	$	14,995	$	42	$	15,037

The changes in Accumulated other comprehensive loss are as follows:


(In millions)	Currency translation and related hedging instruments		Pensions and other postretirement benefits		Cash flow hedges		Total
Balance at January 1, 2022	$	(2,617)	$	(986)	$	(30)	$	(3,633)
Other comprehensive income (loss) before reclassifications	(62)		47		102		87
Amounts reclassified from Accumulated other comprehensive loss (income)	—		30		(1)		29
Net current-period Other comprehensive income (loss)	(62)		77		101		116
Balance at March 31, 2022	$	(2,679)	$	(909)	$	71	$	(3,517)

The reclassifications out of Accumulated other comprehensive loss are as follows:


(In millions)	Three months ended March 31, 2022			Consolidated statements of income classification





Amortization of defined benefit pensions and other postretirement benefits items
Actuarial loss and prior service cost	$	(32)	1


Tax benefit	2
Total, net of tax	(30)

Gains and (losses) on cash flow hedges




Commodity contracts	1			Cost of products sold
Tax expense	—
Total, net of tax	1

Total reclassifications for the period	$	(29)

1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 7 for additional information about pension and other postretirement benefits items.

Net Income Per Share Attributable to Eaton Ordinary Shareholders

A summary of the calculation of net income per share attributable to Eaton ordinary shareholders is as follows:


	Three months ended March 31
(In millions except for per share data)		2022		2021
Net income attributable to Eaton ordinary shareholders		$	532	$	458

Weighted-average number of ordinary shares outstanding - diluted		401.8		400.9
Less dilutive effect of equity-based compensation		2.6		2.6
Weighted-average number of ordinary shares outstanding - basic		399.2		398.3

Net income per share attributable to Eaton ordinary shareholders
Diluted		$	1.33	$	1.14
Basic		1.33		1.15

For the first quarter of 2022, all stock options were included in the calculation of diluted net income per share attributable to Eaton ordinary shareholders because they were all dilutive. For the first quarter of 2021, 0.1 million of stock options 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. FAIR VALUE MEASUREMENTS

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

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


(In millions)	Total		Level 1		Level 2		Level 3
March 31, 2022
Cash	$	237	$	237	$	—	$	—
Short-term investments	268		268		—		—
Net derivative contracts	44		—		44		—
Contingent consideration from acquisition of Green Motion	(57)		—		—		(57)

December 31, 2021
Cash	$	297	$	297	$	—	$	—
Short-term investments	271		271		—		—
Net derivative contracts	41		—		41		—
Contingent consideration from acquisition of Green Motion	(57)		—		—		(57)

Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities.

On March 22, 2021, Eaton acquired Green Motion SA, a leading designer and manufacturer of electric vehicle charging hardware and related software based in Switzerland. Green Motion SA was acquired for $106 million, including $49 million of cash paid at closing and $57 million of estimated fair value of contingent future consideration based on 2023 and 2024 revenue performance. The fair value of contingent consideration liabilities is estimated by discounting contingent payments expected to be made, and may increase or decrease based on changes in revenue estimates and discount rates, with a maximum possible undiscounted value of $109 million.

Other Fair Value Measurements

Long-term debt and the current portion of long-term debt had a carrying value of $8,491 million and fair value of $8,709 million at March 31, 2022 compared to $8,566 million and $9,232 million, respectively, at December 31, 2021. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.

Note 12. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

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

Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.

The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Condensed Consolidated Statements of Cash Flows.

For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.

Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $2,819 million at March 31, 2022 and $2,880 million at December 31, 2021.

Derivative Financial Statement Impacts

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


(In millions)	Notional amount		Other current assets		Other noncurrent assets		Other current liabilities		Other noncurrent liabilities		Type of hedge	Term
March 31, 2022
Derivatives designated as hedges


Forward starting floating-to-fixed interest rate swaps	$	1,700	$	—	$	45	$	—	$	33	Cash flow	10 to 30 years

Currency exchange contracts	1,248		21		—		12		5		Cash flow	1 to 36 months
Commodity contracts	58		5		—		—		—		Cash flow	1 to 12 months
Total			$	26	$	45	$	12	$	38

Derivatives not designated as hedges
Currency exchange contracts	$	4,664	$	42			$	20				1 to 12 months
Commodity contracts	41		2				1					1 month
Total			$	44			$	21

December 31, 2021
Derivatives designated as hedges
Fixed-to-floating interest rate swaps	$	1,800	$	22	$	29	$	—	$	—	Fair value	8 months to 13 years

Forward starting floating-to-fixed interest rate swaps	1,350		—		38		—		79		Cash flow	11 to 31 years
Currency exchange contracts	1,212		17		2		11		3		Cash flow	1 to 36 months
Commodity contracts	50		2		—		1		—		Cash flow	1 to 12 months
Total			$	41	$	69	$	12	$	82

Derivatives not designated as hedges
Currency exchange contracts	$	5,285	$	34			$	9				1 to 12 months
Commodity contracts	62		1				1					1 month
Total			$	35			$	10

The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts. The cash flows resulting from the settlement of these derivatives have been classified in investing activities in the Condensed Consolidated Statement of Cash Flows.

As of March 31, 2022, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:


Commodity	March 31, 2022		Term
Copper	10	Millions of pounds	1 to 12 months
Gold	1,418	Troy ounces	1 to 12 months
Silver	560,367	Troy ounces	1 to 12 months

The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:


(In millions)	Carrying amount of the hedged assets (liabilities)				Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged asset (liabilities) (a)
Location on Consolidated Balance Sheets	March 31, 2022		December 31, 2021			March 31, 2022		December 31, 2021
Long-term debt	$	(2,413)	$	(2,413)		$	(70)	$	(84)

(a) At March 31, 2022 and December 31, 2021, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $70 million and $33 million, respectively.

The impact of hedging activities to the Consolidated Statements of Income is as follows:


	Three months ended March 31, 2022
(In millions)	Net sales		Cost of products sold		Interest expense - net
Amounts from Consolidated Statements of Income	$	4,843	$	3,269	$	32

Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item	$	2	$	(3)	$	—
Derivative designated as hedging instrument	(2)		3		—


Commodity contracts
Hedged item	$	—	$	(1)	$	—
Derivative designated as hedging instrument	—		1		—


Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item	$	—	$	—	$	8
Derivative designated as hedging instrument	—		—		(8)


	Three months ended March 31, 2021
(In millions)	Net sales		Cost of products sold		Interest expense - net
Amounts from Consolidated Statements of Income	$	4,692	$	3,184	$	38

Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item	$	3	$	1	$	—
Derivative designated as hedging instrument	(3)		(1)		—


Commodity contracts
Hedged item	$	—	$	(2)	$	—
Derivative designated as hedging instrument	—		2		—


Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item	$	—	$	—	$	19
Derivative designated as hedging instrument	—		—		(19)

The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:


	Gain (loss) recognized in Consolidated Statements of Income				Consolidated Statements of Income classification
	Three months ended March 31
(In millions)	2022		2021
Gain (loss) on derivatives not designated as hedges
Currency exchange contracts	$	(8)	$	(63)	Interest expense - net
Commodity Contracts	1		2		Cost of products sold
Total	$	(7)	$	(61)

The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements of Income and Comprehensive Income is as follows:















	Gain (loss) recognized in other comprehensive (loss) income				Location of gain (loss) reclassified from Accumulated other comprehensive loss	Gain (loss) reclassified from Accumulated other comprehensive loss
	Three months ended March 31					Three months ended March 31
(In millions)	2022		2021			2022		2021
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	124	$	129	Interest expense - net	$	—	$	—

Currency exchange contracts	—		(13)		Net sales and Cost of products sold	—		(4)
Commodity contracts	5		3		Cost of products sold	1		2
Non-derivative designated as net investment hedges
Foreign currency denominated debt	62		144		Interest expense - net	—		—
Total	$	191	$	263		$	1	$	(2)

At March 31, 2022, a gain of $14 million of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.

Note 13. RESTRUCTURING CHARGES

In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $310 million. These restructuring activities are expected to incur additional expenses of $40 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $350 million for the entire program.

A summary of restructuring program charges is as follows:


	Three months ended March 31
(In millions except for per share data)		2022		2021
Workforce reductions		$	5	$	2
Plant closing and other		13		14
Total before income taxes		18		16
Income tax benefit		4		4
Total after income taxes		$	14	$	12
Per ordinary share - diluted		$	0.03	$	0.03

Restructuring program charges related to the following segments:


	Three months ended March 31
(In millions)		2022		2021
Electrical Americas		$	5	$	5
Electrical Global		5		2
Aerospace		3		1
Vehicle		3		6

Corporate		2		2
Total		$	18	$	16

A summary of liabilities related to workforce reductions, plant closing and other associated costs is as follows:


(In millions)	Workforce reductions		Plant closing and other		Total
Balance at January 1, 2020	$	—	$	—	$	—
Liability recognized	172		42		214
Payments, utilization and translation	(33)		(39)		(72)
Balance at December 31, 2020	$	139	$	3	$	142
Liability recognized	21		57		78
Payments, utilization and translation	(64)		(52)		(116)
Balance at December 31, 2021	$	96	$	8	$	104
Liability recognized	5		13		18
Payments, utilization and translation	(12)		(14)		(26)

Balance at March 31, 2022	$	89	$	7	$	96

These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other income - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 14 for additional information about business segments.

Note 14. BUSINESS SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton's operating segments are Electrical Americas, Electrical Global, Aerospace, Vehicle, and eMobility. On August 2, 2021, Eaton completed the sale of the Hydraulics business. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton's business segments, see Note 17 to the Consolidated Financial Statements contained in the 2021 Form 10-K.


	Three months ended March 31
(In millions)		2022		2021
Net sales
Electrical Americas		$	1,891	$	1,622
Electrical Global		1,437		1,253
Hydraulics		—		561
Aerospace		718		519
Vehicle		671		654
eMobility		126		83
Total net sales		$	4,843	$	4,692

Segment operating profit (loss)
Electrical Americas		$	361	$	332
Electrical Global		279		213
Hydraulics		—		84
Aerospace		159		96
Vehicle		113		113
eMobility		(3)		(7)
Total segment operating profit		909		831

Corporate
Intangible asset amortization expense		(128)		(92)
Interest expense - net		(32)		(38)
Pension and other postretirement benefits income		19		14


Restructuring program charges		(18)		(16)
Other expense - net		(131)		(161)
Income before income taxes		619		538
Income tax expense		86		79
Net income		533		459
Less net income for noncontrolling interests		(1)		(1)
Net income attributable to Eaton ordinary shareholders		$	532	$	458

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