Eaton 10-Q 2022-06-30

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 June 30, 2022

Commission file number 000-54863

EATON CORPORATION plc
(Exact name of registrant as specified in its charter)

Ireland															98-1059235
(State or other jurisdiction of incorporation or organization)															(IRS Employer Identification Number)
Eaton House,			30 Pembroke Road,			Dublin 4,			Ireland						D04 Y0C2
(Address of principal executive offices)															(Zip Code)

															+353						1637 2900
						(Registrant's telephone number, including area code)
						Not applicable
						(Former name, former address and former fiscal year if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class									Trading Symbol												Name of each exchange on which registered
Ordinary shares ($0.01 par value)									ETN												New York Stock Exchange

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):

Large Accelerated Filer			☑						Accelerated filer			☐						Non-accelerated filer			☐
Smaller reporting company			☐						Emerging growth company			☐						(Do not check if a smaller reporting company)

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

Act. ☐

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

There were 398.3 million Ordinary Shares outstanding as of June 30, 2022.

TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS			2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			40
ITEM 4. CONTROLS AND PROCEDURES			40
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS			40
ITEM 1A. RISK FACTORS			40
ITEM 2. UNRESTRICTED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			41
ITEM 6. EXHIBITS			42
SIGNATURES			44

PART I — FINANCIAL INFORMATION

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF INCOME

			Three months ended June 30												Six months ended June 30
(In millions except for per share data)			2022						2021						2022						2021
Net sales			$	5,212					$	5,215					$	10,054					$	9,907
Cost of products sold			3,505						3,545						6,774						6,729
Selling and administrative expense			828						876						1,618						1,671
Research and development expense			168						154						333						302
Interest expense - net			31						37						63						75
Gain on sale of business			—						—						24						—
Other income - net			(41)						(17)						(50)						(28)
Income before income taxes			720						620						1,339						1,158
Income tax expense			119						114						205						193
Net income			601						506						1,135						965
Less net income for noncontrolling interests			—						—						(1)						(1)
Net income attributable to Eaton ordinary shareholders			$	601					$	506					$	1,133					$	964
Net income per share attributable to Eaton ordinary shareholders
Diluted			$	1.50					$	1.26					$	2.82					$	2.40
Basic			1.51						1.27						2.84						2.42
Weighted-average number of ordinary shares outstanding
Diluted			400.7						401.4						401.2						401.2
Basic			399.0						398.8						399.1						398.6
Cash dividends declared per ordinary share			$	0.81					$	0.76					$	1.62					$	1.52

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

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

			Three months ended June 30												Six months ended June 30
(In millions)			2022						2021						2022						2021
Net income			$	601					$	506					$	1,135					$	965
Less net income for noncontrolling interests			—						—						(1)						(1)
Net income attributable to Eaton ordinary shareholders			601						506						1,133						964
Other comprehensive income (loss), net of tax
Currency translation and related hedging instruments			(470)						80						(533)						(92)
Pensions and other postretirement benefits			(41)						161						36						208
Cash flow hedges			68						(47)						169						48
Other comprehensive income (loss) attributable to Eaton ordinary shareholders			(444)						194						(328)						164
Total comprehensive income attributable to Eaton ordinary shareholders			$	157					$	700					$	805					$	1,128

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

EATON CORPORATION plc

CONSOLIDATED BALANCE SHEETS

(In millions)			June 30, 2022						December 31, 2021
Assets
Current assets
Cash			$	364					$	297
Short-term investments			259						271
Accounts receivable - net			3,837						3,297
Inventory			3,445						2,969
Prepaid expenses and other current assets			781						677
Total current assets			8,687						7,511
Property, plant and equipment
Land and buildings			2,156						2,227
Machinery and equipment			5,654						5,591
Gross property, plant and equipment			7,810						7,818
Accumulated depreciation			(4,768)						(4,754)
Net property, plant and equipment			3,043						3,064
Other noncurrent assets
Goodwill			14,805						14,751
Other intangible assets			5,689						5,855
Operating lease assets			493						442
Deferred income taxes			403						392
Other assets			2,033						2,012
Total assets			$	35,153					$	34,027
Liabilities and shareholders’ equity
Current liabilities
Short-term debt			$	1,392					$	13
Current portion of long-term debt			2,030						1,735
Accounts payable			3,013						2,797
Accrued compensation			363						501
Other current liabilities			2,176						2,166
Total current liabilities			8,974						7,212
Noncurrent liabilities

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Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution). Columns and rows may not add and the sum of components may not equal total amounts reported due to rounding.

COMPANY OVERVIEW

Eaton Corporation plc (Eaton or the Company) is an intelligent power management company dedicated to improving the quality of life and protecting the environment for people everywhere. We are guided by our commitment to do business right, to operate sustainably and to help our customers manage power – today and well into the future. By capitalizing on the global growth trends of electrification and digitalization, we're accelerating the planet's transition to renewable energy, helping to solve the world's most urgent power management challenges, and doing what's best for our stakeholders and all of society.

Eaton’s businesses are well-positioned to take advantage of secular growth trends related to the energy transition from fossil fuels to renewables. We are responding to these trends by innovating solutions that transform the electrical power value chain, investing in electrical vehicle markets, increasing our focus on electrification, and employing digital technologies for power management. The Company’s innovations are expected to enable the integration of renewables and sustainability solutions, with new types of equipment, services, and software. These strategic focus areas are an important part of our response to climate change.

Founded in 1911, Eaton has been listed on the New York Stock Exchange for nearly a century. We reported revenues of $19.6 billion in 2021 and serve customers in more than 170 countries.

Portfolio Changes

The Company continues to actively manage its portfolio of businesses to deliver on its strategic objectives. The Company is focused on deploying its capital toward businesses that provide opportunities for above-market growth, strong returns, and align with secular trends and its power management strategies. During 2021 and 2022, Eaton has completed a number of transactions to strengthen its portfolio.

Acquisitions of businesses and investments in associate companies						Date of acquisition						Business segment
Tripp Lite						March 17, 2021						Electrical Americas
A leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas.
Green Motion SA						March 22, 2021						Electrical Global
A leading designer and manufacturer of electric vehicle charging hardware and related software.
HuanYu High Tech						March 29, 2021						Electrical Global
A 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region.
Mission Systems						June 1, 2021						Aerospace
A leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets.
Jiangsu YiNeng Electric's busway business						June 25, 2021						Electrical Global
A 50 percent stake in Jiangsu YiNeng Electric's busway business which manufactures and markets busway products in China.
Royal Power Solutions						January 5, 2022						eMobility
A manufacturer of high-precision electrical connectivity components used in electric vehicle, energy management, industrial and mobility markets.
Jiangsu Huineng Electric Co., Ltd’s circuit breaker business						July 1, 2022						Electrical Global
A 50 percent stake in Jiangsu Huineng Electric Co., Ltd's circuit breaker business which manufactures and markets low-voltage circuit breakers in China.

Divestiture of business						Date of divestiture						Business segment
Hydraulics business						August 2, 2021						Hydraulics

Additional information related to acquisitions and divestiture of businesses is presented in Note 2.

Restructuring

In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $320 million. These restructuring activities are expected to incur additional expenses of $30 million in 2022 primarily comprised of plant closing and other costs, resulting in total estimated charges of $350 million for the entire program. The projected mature year savings from these restructuring actions are expected to be $250 million when fully implemented in 2023. Additional information related to this restructuring is presented in Note 13.

Summary of Results of Operations

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

			Three months ended June 30												Six months ended June 30
(In millions except for per share data)			2022						2021						2022						2021
Net sales			$	5,212					$	5,215					$	10,054					$	9,907
Net income attributable to Eaton ordinary shareholders			601						506						1,133						964
Net income per share attributable to Eaton ordinary shareholders - diluted			$	1.50					$	1.26					$	2.82					$	2.40

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

The following discussion of Consolidated Financial Results includes certain non-GAAP financial measures. These financial measures include adjusted earnings and adjusted earnings per ordinary share, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the Consolidated Financial Results table below. Management believes that these financial measures are useful to investors because they provide additional meaningful financial information that should be considered when assessing our business performance and trends, and they allow investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton.

Acquisition and Divestiture Charges

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

			Three months ended June 30												Six months ended June 30
(In millions except for per share data)			2022						2021						2022						2021
Acquisition integration, divestiture charges and transaction costs			$	51					$	87					$	79					$	133
Gain on the sale of the Hydraulics business			—						—						(24)						—
Total before income taxes			51						87						55						133
Income tax benefit			7						15						8						24
Total after income taxes			$	44					$	72					$	47					$	109
Per ordinary share - diluted			$	0.11					$	0.18					$	0.12					$	0.27

Acquisition integration, divestiture charges and transaction costs in 2022 are primarily related to the acquisitions of Royal Power Solutions, Souriau-Sunbank Connection Technologies, Green Motion, Tripp Lite, and Mission Systems, and other charges to acquire and exit businesses. These costs also included charges of $29 million presented in Other income - net on the Consolidated Statements of Income related to the decision in the second quarter to exit the Company's business operations in Russia. These charges consisted primarily of write-downs of accounts receivable, inventory and other assets, and accruals for severance. Charges in 2021 are primarily related to the divestiture of the Hydraulics business, the acquisitions of Tripp Lite, Mission Systems, Souriau-Sunbank Connection Technologies, and Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S., and other charges to exit businesses. These charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other income - net. In Business Segment Information in Note 14, the charges were included in Other expense - net.

Intangible Asset Amortization Expense

Intangible asset amortization expense is as follows:

			Three months ended June 30												Six months ended June 30
(In millions except for per share data)			2022						2021						2022						2021
Intangible asset amortization expense			$	122					$	108					$	250					$	200
Income tax benefit			23						7						52						29
Total after income taxes			$	99					$	101					$	198					$	171
Per ordinary share - diluted			$	0.24					$	0.25					$	0.50					$	0.43

Consolidated Financial Results

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions except for per share data)			2022						2021									2022						2021
Net sales			$	5,212					$	5,215					—		%				$	10,054					$	9,907					1		%
Gross profit			1,706						1,670						2		%				3,280						3,178						3		%
Percent of net sales			32.7		%				32.0		%										32.6		%				32.1		%
Income before income taxes			720						620						16		%				1,339						1,158						16		%
Net income			601						506						19		%				1,135						965						18		%
Less net income for noncontrolling interests			—						—												(1)						(1)
Net income attributable to Eaton ordinary shareholders			601						506						19		%				1,133						964						18		%
Excluding acquisition and divestiture charges, after-tax			44						72												47						109
Excluding restructuring program charges, after-tax			8						11												22						23
Excluding intangible asset amortization expense, after-tax			99						101												198						171
Adjusted earnings			$	751					$	690					9		%				$	1,400					$	1,267					10		%
Net income per share attributable to Eaton ordinary shareholders - diluted			$	1.50					$	1.26					19		%				$	2.82					$	2.40					18		%
Excluding per share impact of acquisition and divestiture charges, after-tax			0.11						0.18												0.12						0.27
Excluding per share impact of restructuring program charges, after-tax			0.02						0.03												0.05						0.06
Excluding per share impact of intangible asset amortization expense, after-tax			0.24						0.25												0.50						0.43
Adjusted earnings per ordinary share			$	1.87					$	1.72					9		%				$	3.49					$	3.16					10		%

Net Sales

Changes in Net sales are summarized as follows:			Three months ended June 30						Six months ended June 30
			2022						2022
Organic growth			11		%				11		%
Acquisitions of businesses			2		%				4		%
Divestiture of business			(11)		%				(12)		%
Foreign currency			(2)		%				(2)		%
Total increase (decrease) in Net sales			—		%				1		%

Organic sales increased 11% in the second quarter and first six months of 2022 due to broad-based strength in end-markets of the Electrical Americas and Electrical Global business segments, strength in sales to commercial OEM and aftermarket in the Aerospace business segment, and higher sales volumes from inflationary price increases in the Vehicle business segment. Despite strong growth, many of our businesses continue to be impacted by supply chain disruptions or shortages, inflation, labor shortages, and plant shutdowns associated with lockdowns in various cities around the globe.

The acquisitions of Mission Systems and Royal Power Solutions increased sales in the second quarter of 2022 and the acquisitions of Tripp Lite, Mission Systems, and Royal Power Solutions increased sales in the first six months of 2022. The divestiture of the Hydraulics business reduced sales in the second quarter and first six months of 2022.

Gross Profit

Gross profit margin increased from 32.0% in the second quarter of 2021 to 32.7% in the second quarter of 2022 and from 32.1% in the first six months of 2021 to 32.6% in the first six months of 2022 primarily due to higher organic sales, including favorable pricing recovery. Gross profit also improved due to the net impact of the acquisition of Royal Power Solutions and the divestiture of the Hydraulics business. Conversely, commodity and logistics inflation had an unfavorable impact on gross margin during the second quarter and first six months of 2022, despite offsetting pricing actions.

Income Taxes

The effective income tax rate for the second quarter of 2022 was expense of 16.5% compared to expense of 18.4% for the second quarter of 2021. The decrease in the effective tax rate in the second quarter of 2022 was primarily due to the one-time impact of a tax rate change in the United Kingdom recognized in the second quarter of 2021. The effective income tax rate for the first six months of 2022 was expense of 15.3% compared to expense of 16.7% for the first six months of 2021. The decrease in the effective tax rate in the first six months of 2022 was primarily due to excess tax benefits recognized for employee share-based payments in 2022 and the one-time impact of a tax rate change in the United Kingdom recognized in the first six months of 2021.

Net Income

Net income attributable to Eaton ordinary shareholders of $601 million in the second quarter of 2022 increased 19% compared to Net income attributable to Eaton ordinary shareholders of $506 million in the second quarter of 2021. The increase in the second quarter of 2022 was primarily due to higher gross profit, lower acquisition and divestiture charges, and a net improvement in other income which included gains from the sale of certain office facilities. Net income attributable to Eaton ordinary shareholders of $1,133 million in the first six months of 2022 increased 18% compared to Net income attributable to Eaton ordinary shareholders of $964 million in the first six months of 2021. The increase in the first six months of 2022 was primarily due to higher gross profit, lower acquisition and divestiture charges and a net improvement in other income which included gains from the sale of certain office facilities, partially offset by higher intangible asset amortization expense.

Net income per ordinary share increased to $1.50 in the second quarter of 2022 compared to $1.26 in the second quarter of 2021. Net income per ordinary share increased to $2.82 in the first six months of 2022 compared to $2.40 in the first six months of 2022. The increase in Net income per ordinary share in the second quarter and first six months of 2022 was due to higher Net income attributable to Eaton ordinary shareholders and the impact of the Company's share repurchases over the past year.

Adjusted Earnings

Adjusted earnings of $751 million in the second quarter of 2022 increased 9% compared to Adjusted earnings of $690 million in the second quarter of 2021. Adjusted earnings of $1,400 million in the first six months of 2022 increased 10% compared to Adjusted earnings of $1,267 million in the first six months of 2021. The increase in Adjusted earnings in the second quarter and first six months of 2022 was primarily due to higher Net income attributable to Eaton ordinary shareholders, adjusted for acquisition and divestiture charges, restructuring program charges, and intangible asset amortization expense.

Adjusted earnings per ordinary share increased to $1.87 in the second quarter of 2022 compared to $1.72 in the second quarter of 2021. Adjusted earnings per ordinary share increased to $3.49 in the first six months of 2022 compared to $3.16 in the first six months of 2022. The increase in Adjusted earnings per ordinary share in the second quarter and first six months of 2022 was due to higher Adjusted earnings and the impact of the Company's share repurchases over the past year.

Business Segment Results of Operations

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

Electrical Americas

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Net sales			$	2,131					$	1,849					15		%				$	4,022					$	3,471					16		%
Operating profit			$	495					$	393					26		%				$	857					$	725					18		%
Operating margin			23.2		%				21.3		%										21.3		%				20.9		%
Changes in Net sales are summarized as follows:															Three months ended June 30																		Six months ended June 30
															2022																		2022
Organic growth															16		%																13		%
Acquisition of Tripp Lite															—		%																3		%
Foreign currency															(1)		%																—		%
Total increase (decrease) in Net sales															15		%																16		%

The increase in organic sales in the second quarter and first six months of 2022 reflects broad-based strength in end-markets, with particular strength in commercial, residential and industrial.

The operating margin increased from 21.3% in the second quarter of 2021 to 23.2% in the second quarter of 2022 and from 20.9% in the first six months of 2021 to 21.3% in the first six months of 2022 primarily due to higher sales volumes including favorable pricing recovery, while headwinds from commodity and logistics inflation and supply chain disruptions were offset by gains from the sale of certain office facilities.

Electrical Global

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Net sales			$	1,495					$	1,418					5		%				$	2,932					$	2,671					10		%
Operating profit			$	282					$	259					9		%				$	561					$	472					19		%
Operating margin			18.9		%				18.3		%										19.1		%				17.7		%
Changes in Net sales are summarized as follows:															Three months ended June 30																		Six months ended June 30
															2022																		2022
Organic growth															12		%																15		%
Foreign currency															(7)		%																(5)		%
Total increase (decrease) in Net sales															5		%																10		%

The increase in organic sales in the second quarter and first six months of 2022 was primarily due to broad-based strength in end-markets, with particular strength in data center, commercial and industrial markets.

The operating margin increased from 18.3% in the second quarter of 2021 to 18.9% in the second quarter of 2022 and from 17.7% in the first six months of 2021 to 19.1% in the first six months of 2022 primarily due to higher sales volumes including favorable pricing recovery, partially offset by commodity and logistics inflation.

Hydraulics

On August 2, 2021, Eaton completed the sale of the Hydraulics business segment. For the second quarter and first six months ended June 30, 2021, the Hydraulics segment generated net sales of $560 million and $1,121 million, respectively, and operating profit of $73 million and $157 million, respectively.

Aerospace

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Net sales			$	742					$	625					19		%				$	1,459					$	1,144					28		%
Operating profit			$	163					$	131					24		%				$	321					$	227					41		%
Operating margin			21.9		%				21.0		%										22.0		%				19.8		%
Changes in Net sales are summarized as follows:															Three months ended June 30																		Six months ended June 30
															2022																		2022
Organic growth															10		%																12		%
Acquisition of Mission Systems															12		%																19		%
Foreign currency															(3)		%																(3)		%
Total increase (decrease) in Net sales															19		%																28		%

The increase in organic sales in the second quarter and first six months of 2022 was primarily due to strength in sales to commercial OEM and aftermarket.

The operating margin increased from 21.0% in the second quarter of 2021 to 21.9% in the second quarter of 2022 and from 19.8% in the first six months of 2021 to 22.0% in the first six months of 2022 primarily due to higher organic sales volumes.

Vehicle

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Net sales			$	708					$	675					5		%				$	1,379					$	1,329					4		%
Operating profit			$	108					$	121					(11)		%				$	221					$	234					(6)		%
Operating margin			15.3		%				17.9		%										16.0		%				17.6		%
Changes in Net sales are summarized as follows:															Three months ended June 30																		Six months ended June 30
															2022																		2022
Organic growth															7		%																5		%
Foreign currency															(2)		%																(1)		%
Total increase (decrease) in Net sales															5		%																4		%

The increase in organic sales in the second quarter of 2022 was primarily due to strength in the South American truck, bus and agriculture markets, and North American light vehicle markets, partially offset by weakness in the China light vehicle market primarily due to COVID-19 related lockdowns. The increase in organic sales in the first six months of 2022 was primarily due to strength in the South American truck, bus and agriculture markets, and North American truck and light vehicle markets, partially offset by weakness in the China light vehicle market primarily due to COVID-19 related lockdowns.

The operating margin decreased from 17.9% in the second quarter of 2021 to 15.3% in the second quarter of 2022 and from 17.6% in the first six months of 2021 to 16.0% in the first six months of 2022 primarily due to commodity and logistics inflation and operating inefficiencies due to supply chain constraints, partially offset by higher sales volumes from inflationary price increases.

eMobility

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Net sales			$	136					$	88					55		%				$	262					$	171					53		%
Operating profit (loss)			$	(2)					$	(6)					67		%				$	(5)					$	(13)					62		%
Operating margin			(1.5)		%				(6.8)		%										(1.8)		%				(7.6)		%
Changes in Net sales are summarized as follows:															Three months ended June 30																		Six months ended June 30
															2022																		2022
Organic growth															11		%																9		%
Acquisition of Royal Power Solutions															46		%																46		%
Foreign currency															(2)		%																(2)		%
Total increase (decrease) in Net sales															55		%																53		%

The increase in organic sales in the second quarter and first six months of 2022 was due to strength in all regions.

The operating margin increased from negative 6.8% in the second quarter of 2021 to negative 1.5% in the second quarter of 2022 and from negative 7.6% in the first six months of 2021 to negative 1.8% in the first six months of 2022 primarily due to higher organic sales volumes and the acquisition of Royal Power Solutions.

Corporate Expense

			Three months ended June 30												Increase (decrease)						Six months ended June 30												Increase (decrease)
(In millions)			2022						2021									2022						2021
Intangible asset amortization expense			$	122					$	108					13		%				$	250					$	200					25		%
Interest expense - net			31						37						(16)		%				63						75						(16)		%
Pension and other postretirement benefits income			(9)						(16)						(44)		%				(28)						(30)						(7)		%
Restructuring program charges			10						13						(23)		%				28						29						(3)		%
Other expense - net			171						209						(18)		%				302						370						(18)		%
Total corporate expense			$	325					$	351					(7)		%				$	615					$	644					(5)		%

Total corporate expense was $325 million in the second quarter of 2022 compared to $351 million in the second quarter of 2021 and $615 million in the first six months of 2022 compared to $644 million in the first six months of 2021. The decreases in Total corporate expense for the second quarter and first six months of 2022 were primarily due to lower Other expense - net and lower Interest expense - net, partially offset by higher Intangible asset amortization expense. The decreases in Other expense - net are primarily due to lower acquisition and divestiture charges and the gain on sale of the Hydraulics business recognized in the first quarter of 2022 discussed in Note 2.

LIQUIDITY, CAPITAL RESOURCES, AND FINANCIAL CONDITION

Liquidity and Financial Condition

Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk.

The Company maintains revolving credit facilities consisting of a $500 million 364-day revolving credit facility that will expire on October 3, 2022 and a $2,000 million five-year revolving credit facility that will expire on October 4, 2026. The revolving credit facilities totaling $2,500 million are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton’s revolving credit facilities at June 30, 2022. The Company maintains access to the commercial paper markets through its $2,500 million commercial paper program, of which $1,372 million was outstanding on June 30, 2022.

In 2021, Eaton received proceeds of $3.1 billion from the sale of its Hydraulics business and paid $4.45 billion to acquire Tripp Lite and Mission Systems. In 2022, the Company paid $612 million to acquire Royal Power Solutions and received cash of $22 million from Danfoss A/S to fully settle all post-closing adjustments from the sale of the Hydraulics business.

Over the course of a year, cash, short-term investments, and short-term debt may fluctuate in order to manage global liquidity. As of June 30, 2022 and December 31, 2021, Eaton had cash of $364 million and $297 million, short-term investments of $259 million and $271 million, and short-term debt of $1,392 million and $13 million, respectively. Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, availability under existing revolving credit facilities, and access to capital markets in excess of the liquidity necessary to meet future operating needs of the business, fund capital expenditures and acquisitions of businesses, as well as scheduled payments of long-term debt.

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

Cash Flows

A summary of cash flows is as follows:

			Six months ended June 30
(In millions)			2022						2021						Change from 2021
Net cash provided by operating activities			$	382					$	897					$	(515)
Net cash used in investing activities			(822)						(4,483)						3,661
Net cash provided by financing activities			492						3,453						(2,961)
Effect of currency on cash			15						(13)						28
Increase in cash classified as held for sale			—						(13)						13
Total increase (decrease) in cash			$	66					$	(159)

Operating Cash Flow

Net cash provided by operating activities decreased by $515 million in the first six months of 2022 compared to 2021. The decrease in net cash provided by operating activities in the first six months of 2022 was primarily due to higher working capital balances to support the Company’s organic growth, partially offset by lower pension contributions in 2022 due to a $200 million contribution to Eaton's U.S. qualified pension plan in 2021, cash received from the termination of interest rate swaps in 2022, and higher net income in 2022.

Investing Cash Flow

Net cash used in investing activities decreased by $3,661 million in the first six months of 2022 compared to 2021. The decrease in the use of cash in the first six months of 2022 was primarily driven by the decrease in cash paid for business acquisitions to $612 million in 2022 from $4,500 million in 2021, a decrease in cash paid for investments in associate companies to $17 million in 2022 from $122 million in 2021, and proceeds from the sale of certain office facilities in 2022, partially offset by net purchases of short-term investments of $4 million in 2022 compared to net sales of $401 million in 2021.

Financing Cash Flow

Net cash provided by financing activities decreased by $2,961 million in the first six months of 2022 compared to 2021. The decrease in the source of cash in the first six months of 2022 was primarily due to no proceeds from borrowings in 2022 compared to proceeds from borrowings of $1,798 million in 2021, a decrease in net proceeds of short-term debt to $1,384 million in 2022 from $3,380 million in 2021, and higher share repurchases of $186 million in 2022 compared to $76 million in 2021, partially offset by lower payments on borrowings of $6 million in 2022 compared to $1,009 million in 2021.

Uses of Cash

Capital Expenditures

Capital expenditures were $254 million and $272 million in the first six months of 2022 and 2021, respectively. Eaton expects approximately $650 million in capital expenditures in 2022.

Dividends

Cash dividend payments were $654 million and $613 million in the first six months of 2022 and 2021, respectively. Payment of quarterly dividends in the future depends upon the Company’s ability to generate net income and operating cash flows, among other factors, and is subject to declaration by the Eaton Board of Directors. The Company intends to continue to pay quarterly dividends in 2022.

Share Repurchases

On February 27, 2019, the Board of Directors adopted a share repurchase program for share repurchases up to $5.0 billion of ordinary shares (2019 Program). On February 23, 2022, the Board renewed the 2019 Program by providing authority for up to $5.0 billion in repurchases to be made during the three-year period commencing on that date (2022 Program). Under the 2022 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. In the first six months of 2022, 1.3 million ordinary shares were repurchased under the 2022 program in the open market at a total cost of $186 million. In the first six months of 2021, 0.6 million ordinary shares were repurchased under the 2019 Program in the open market at a total cost of $76 million. At June 30, 2022, there is $4,814 million still available for share repurchases under the 2022 Program. The Company will continue to pursue share repurchases in 2022 depending on market conditions and capital levels.

Acquisition of Businesses

The Company paid cash of $612 million and $4,500 million to acquire businesses in the first six months of 2022 and 2021, respectively. The Company will continue to focus on deploying its capital toward businesses that provide opportunities for higher growth and strong returns, and align with secular trends and its power management strategies.

Debt

The Company manages a number of short-term and long-term debt instruments, including commercial paper. At June 30, 2022, the Company had Short-term debt of $1,392 million, Current portion of long-term debt of $2,030 million, and Long-term debt of $6,277 million.

Supply Chain Finance Program

The Company negotiates payment terms directly with its suppliers for the purchase of goods and services. In addition, a third-party financial institution offers a voluntary supply chain finance (SCF) program that enables certain of the Company’s suppliers, at the supplier’s sole discretion, to sell receivables due from the Company to the financial institution on terms directly negotiated with the financial institution. If a supplier elects to participate in the SCF program, the supplier decides which invoices are sold to the financial institution and the Company has no economic interest in a supplier’s decision to sell an invoice. The SCF program does not have a significant impact on the Company’s liquidity as payments by the Company to participating suppliers are paid to the financial institution on the invoice due date, regardless of whether an individual invoice is sold by the supplier to the financial institution. The amounts due to the financial institution for suppliers that participate in the SCF program are included in Accounts payable on the Company’s Consolidated Balance Sheets, and the associated payments are included in operating activities on the Condensed Consolidated Statements of Cash Flows. At  June 30, 2022 and December 31, 2021, Accounts payable included $183 million and $151 million, respectively, payable to suppliers that have elected to participate in the SCF program.

Guaranteed Debt

Issuers, Guarantors and Guarantor Structure

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

Substantially all of the Senior Notes, together with the credit facilities described above under Financial Condition and Liquidity (the Credit Facilities), are guaranteed by Eaton and 18 of its subsidiaries. Accordingly, they rank equally with each other. However, because these obligations are not secured, they would be effectively subordinated to any existing or future secured indebtedness of Eaton and its subsidiaries. As of June 30, 2022, Eaton has no material, long-term secured debt. The guaranteed Registered Senior Notes are also structurally subordinated to the liabilities of Eaton's subsidiaries that are not guarantors. Except as described below under Future Guarantors, Eaton is not obligated to cause its subsidiaries to guarantee the Registered Senior Notes.

The table set forth in Exhibit 22 filed with this Form 10-Q details the primary obligors and guarantors with respect to the guaranteed Registered Senior Notes.

Terms of Guarantees of Registered Securities

Payment of principal and interest on the Registered Senior Notes is guaranteed, on an unsecured, unsubordinated basis by the subsidiaries of Eaton set forth in the table referenced in the 10-K Exhibit 22. Each guarantee is full and unconditional, and joint and several. Each guarantor's guarantee is an unsecured obligation that ranks equally with all its other unsecured and unsubordinated indebtedness. The obligations of each guarantor under its guarantee of the Registered Senior Notes is subject to a customary savings clause or similar provision designed to prevent such guarantee from constituting a fraudulent conveyance or otherwise legally impermissible or voidable obligation.

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

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

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

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

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

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

The guarantee of Eaton does not contain any release provisions.

Future Guarantors

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

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

Summarized Financial Information of Guarantors and Issuers

(In millions)						June 30, 2022						December 31, 2021
Current assets						$	3,701					$	3,032
Noncurrent assets						11,535						11,553
Current liabilities						5,606						3,950
Noncurrent liabilities						7,922						8,461
Amounts due to subsidiaries that are non-issuers and non-guarantors - net						16,976						18,006
												Six months ended June 30
(In millions)												2022
Net sales												$	5,359
Sales to subsidiaries that are non-issuers and non-guarantors												449
Cost of products sold												4,467
Expense from subsidiaries that are non-issuers and non-guarantors - net												257
Net income												20

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

FORWARD-LOOKING STATEMENTS

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