filings.toolsItem 1. FINANCIAL STATEMENTS.
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Item 1. FINANCIAL STATEMENTS.
EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF INCOME
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| (In millions except for per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net sales | $ | 5,866 | $ | 5,212 | $ | 11,349 | $ | 10,054 | |||||||||||||||
| Cost of products sold | 3,747 | 3,505 | 7,346 | 6,774 | |||||||||||||||||||
| Selling and administrative expense | 986 | 828 | 1,890 | 1,618 | |||||||||||||||||||
| Research and development expense | 187 | 168 | 366 | 333 | |||||||||||||||||||
| Interest expense - net | 42 | 31 | 91 | 63 | |||||||||||||||||||
| Gain on sale of business | — | — | — | 24 | |||||||||||||||||||
| Other expense (income) - net | 7 | (41) | (4) | (50) | |||||||||||||||||||
| Income before income taxes | 898 | 720 | 1,660 | 1,339 | |||||||||||||||||||
| Income tax expense | 153 | 119 | 276 | 205 | |||||||||||||||||||
| Net income | 745 | 601 | 1,384 | 1,135 | |||||||||||||||||||
| Less net income for noncontrolling interests | (1) | — | (3) | (1) | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 744 | $ | 601 | $ | 1,382 | $ | 1,133 | |||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ | 1.86 | $ | 1.50 | $ | 3.45 | $ | 2.82 | |||||||||||||||
| Basic | 1.86 | 1.51 | 3.47 | 2.84 | |||||||||||||||||||
| Weighted-average number of ordinary shares outstanding | |||||||||||||||||||||||
| Diluted | 400.7 | 400.7 | 400.6 | 401.2 | |||||||||||||||||||
| Basic | 398.9 | 399.0 | 398.7 | 399.1 | |||||||||||||||||||
| Cash dividends declared per ordinary share | $ | 0.86 | $ | 0.81 | $ | 1.72 | $ | 1.62 |
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) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income | $ | 745 | $ | 601 | $ | 1,384 | $ | 1,135 | |||||||||||||||
| Less net income for noncontrolling interests | (1) | — | (3) | (1) | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | 744 | 601 | 1,382 | 1,133 | |||||||||||||||||||
| Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Currency translation and related hedging instruments | 57 | (470) | 176 | (533) | |||||||||||||||||||
| Pensions and other postretirement benefits | (2) | (41) | (5) | 36 | |||||||||||||||||||
| Cash flow hedges | (1) | 68 | 14 | 169 | |||||||||||||||||||
| Other comprehensive income (loss) attributable to Eaton ordinary shareholders | 53 | (444) | 185 | (328) | |||||||||||||||||||
| Total comprehensive income attributable to Eaton ordinary shareholders | $ | 797 | $ | 157 | $ | 1,567 | $ | 805 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONSOLIDATED BALANCE SHEETS
| (In millions) | June 30, 2023 | December 31, 2022 | |||||||||
| Assets | |||||||||||
| Current assets | |||||||||||
| Cash | $ | 353 | $ | 294 | |||||||
| Short-term investments | 977 | 261 | |||||||||
| Accounts receivable - net | 4,399 | 4,076 | |||||||||
| Inventory | 3,670 | 3,430 | |||||||||
| Prepaid expenses and other current assets | 904 | 685 | |||||||||
| Total current assets | 10,303 | 8,746 | |||||||||
| Property, plant and equipment | |||||||||||
| Land and buildings | 2,198 | 2,129 | |||||||||
| Machinery and equipment | 6,139 | 5,885 | |||||||||
| Gross property, plant and equipment | 8,337 | 8,013 | |||||||||
| Accumulated depreciation | (5,071) | (4,867) | |||||||||
| Net property, plant and equipment | 3,267 | 3,146 | |||||||||
| Other noncurrent assets | |||||||||||
| Goodwill | 14,914 | 14,796 | |||||||||
| Other intangible assets | 5,285 | 5,485 | |||||||||
| Operating lease assets | 594 | 570 | |||||||||
| Deferred income taxes | 354 | 330 | |||||||||
| Other assets | 2,056 | 1,940 | |||||||||
| Total assets | $ | 36,772 | $ | 35,014 | |||||||
| Liabilities and shareholders’ equity | |||||||||||
| Current liabilities | |||||||||||
| Short-term debt | $ | 94 | $ | 324 | |||||||
| Current portion of long-term debt | 402 | 10 | |||||||||
| Accounts payable | 3,192 | 3,072 | |||||||||
| Accrued compensation | 465 | 467 | |||||||||
| Other current liabilities | 2,571 | 2,488 | |||||||||
| Total current liabilities | 6,725 | 6,360 | |||||||||
| Noncurrent liabilities | |||||||||||
| Long-term debt | 8,804 | 8,321 | |||||||||
| Pension liabilities | 642 | 649 | |||||||||
| Other postretirement benefits liabilities | 173 | 177 | |||||||||
| Operating lease liabilities | 482 | 459 | |||||||||
| Deferred income taxes | 531 | 530 | |||||||||
| Other noncurrent liabilities | 1,428 | 1,444 | |||||||||
| Total noncurrent liabilities | 12,060 | 11,580 | |||||||||
| Shareholders’ equity | |||||||||||
| Ordinary shares (399.0 million outstanding in 2023 and 397.8 million in 2022) | 4 | 4 | |||||||||
| Capital in excess of par value | 12,554 | 12,512 | |||||||||
| Retained earnings | 9,156 | 8,468 | |||||||||
| Accumulated other comprehensive loss | (3,760) | (3,946) | |||||||||
| Shares held in trust | (1) | (1) | |||||||||
| Total Eaton shareholders’ equity | 17,953 | 17,038 | |||||||||
| Noncontrolling interests | 36 | 38 | |||||||||
| Total equity | 17,988 | 17,075 | |||||||||
| Total liabilities and equity | $ | 36,772 | $ | 35,014 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six months ended June 30 | |||||||||||
| (In millions) | 2023 | 2022 | |||||||||
| Operating activities | |||||||||||
| Net income | $ | 1,384 | $ | 1,135 | |||||||
| Adjustments to reconcile to net cash provided by operating activities | |||||||||||
| Depreciation and amortization | 466 | 479 | |||||||||
| Deferred income taxes | (3) | (14) | |||||||||
| Pension and other postretirement benefits expense | 9 | 21 | |||||||||
| Contributions to pension plans | (51) | (55) | |||||||||
| Contributions to other postretirement benefits plans | (10) | (12) | |||||||||
| Gain on sale of business | — | (24) | |||||||||
| Changes in working capital | (622) | (1,144) | |||||||||
| Other - net | 12 | (5) | |||||||||
| Net cash provided by operating activities | 1,185 | 382 | |||||||||
| Investing activities | |||||||||||
| Capital expenditures for property, plant and equipment | (286) | (254) | |||||||||
| Proceeds from sales of property, plant and equipment | — | 92 | |||||||||
| Cash paid for acquisition of a business, net of cash acquired | — | (612) | |||||||||
| Proceeds from (payments for) sale of business, net of cash sold | (1) | 22 | |||||||||
| Investments in associate companies | (68) | (17) | |||||||||
| Purchases of short-term investments - net | (719) | (4) | |||||||||
| Proceeds from (payments for) settlement of currency exchange contracts not designated as hedges - net | 42 | (9) | |||||||||
| Other - net | 2 | (41) | |||||||||
| Net cash used in investing activities | (1,030) | (822) | |||||||||
| Financing activities | |||||||||||
| Proceeds from borrowings | 818 | — | |||||||||
| Payments on borrowings | (5) | (6) | |||||||||
| Short-term debt, net | (225) | 1,384 | |||||||||
| Cash dividends paid | (692) | (654) | |||||||||
| Exercise of employee stock options | 46 | 13 | |||||||||
| Repurchase of shares | — | (186) | |||||||||
| Employee taxes paid from shares withheld | (47) | (58) | |||||||||
| Other - net | (7) | (1) | |||||||||
| Net cash provided by (used in) financing activities | (113) | 492 | |||||||||
| Effect of currency on cash | 16 | 15 | |||||||||
| Total increase in cash | 59 | 66 | |||||||||
| Cash at the beginning of the period | 294 | 297 | |||||||||
| Cash at the end of the period | $ | 353 | $ | 364 |
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). Columns and rows may not add and the sum of components may not equal total amounts reported due to rounding.
**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 2022 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.
Adoption of New Accounting Standard
Eaton adopted Accounting Standards Update 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, in the first quarter of 2023. The standard requires disclosure of certain information about the Company's supply chain finance program, including key terms and a rollforward of confirmed amounts payable. The adoption of the standard did not have a material impact on the condensed consolidated financial statements.
**Note 2.**ACQUISITIONS AND DIVESTITURE OF BUSINESSES
Sale of Hydraulics business
On August 2, 2021, Eaton completed the sale of the Hydraulics business to Danfoss A/S and recognized a pre-tax gain of $617 million in 2021. The Company finalized negotiations of post-closing adjustments with Danfoss A/S and recognized an additional pre-tax gain of $24 million in the first quarter of 2022 and received cash of $22 million in the second quarter of 2022 from Danfoss A/S to fully settle all post-closing adjustments.
Acquisition of Royal Power Solutions
On January 5, 2022, Eaton acquired Royal Power Solutions for $610 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.
Eaton's 2022 Condensed Consolidated Financial Statements include Royal Power Solutions' results of operations, including segment operating profit of $11 million on sales of $79 million, from the date of acquisition through June 30, 2022.
Russia
During the second quarter of 2022, in light of the ongoing war with Ukraine, the Company decided to exit its business operations in Russia and recorded charges of $29 million presented in Other expense (income) - net on the Consolidated Statements of Income. The charges consisted primarily of write-downs of accounts receivable, inventory and other assets, and accruals for severance.
Acquisition of a 50% stake in Jiangsu Huineng Electric Co., Ltd’s circuit breaker business
On July 1, 2022, Eaton acquired a 50 percent stake in Jiangsu Huineng Electric Co., Ltd’s circuit breaker business, which manufactures and markets low-voltage circuit breakers in China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.
Acquisition of a 49% stake in Jiangsu Ryan Electrical Co. Ltd.
On April 23, 2023, Eaton acquired a 49 percent stake in Jiangsu Ryan Electrical Co. Ltd., a manufacturer of power distribution and sub-transmission transformers in China. Eaton accounts for this investment on the equity method of accounting and is reported within the Electrical Global business segment.
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 June 30 | Six months ended June 30 | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Electrical Americas | |||||||||||||||||||||||
| Products | $ | 757 | $ | 695 | $ | 1,473 | $ | 1,298 | |||||||||||||||
| Systems | 1,781 | 1,436 | 3,359 | 2,724 | |||||||||||||||||||
| Total | $ | 2,538 | $ | 2,131 | $ | 4,832 | $ | 4,022 | |||||||||||||||
| Electrical Global | |||||||||||||||||||||||
| Products | $ | 889 | $ | 878 | $ | 1,772 | $ | 1,754 | |||||||||||||||
| Systems | 680 | 617 | 1,297 | 1,178 | |||||||||||||||||||
| Total | $ | 1,569 | $ | 1,495 | $ | 3,069 | $ | 2,932 | |||||||||||||||
| Aerospace | |||||||||||||||||||||||
| Original Equipment Manufacturers | $ | 324 | $ | 285 | $ | 638 | $ | 577 | |||||||||||||||
| Aftermarket | 297 | 242 | 561 | 463 | |||||||||||||||||||
| Industrial and Other | 226 | 215 | 451 | 419 | |||||||||||||||||||
| Total | $ | 848 | $ | 742 | $ | 1,650 | $ | 1,459 | |||||||||||||||
| Vehicle | |||||||||||||||||||||||
| Commercial | $ | 459 | $ | 445 | $ | 907 | $ | 847 | |||||||||||||||
| Passenger and Light Duty | 292 | 263 | 583 | 532 | |||||||||||||||||||
| Total | $ | 751 | $ | 708 | $ | 1,490 | $ | 1,379 | |||||||||||||||
| eMobility | $ | 161 | $ | 136 | $ | 308 | $ | 262 | |||||||||||||||
| Total net sales | $ | 5,866 | $ | 5,212 | $ | 11,349 | $ | 10,054 |
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 $3,876 million and $3,581 million at June 30, 2023 and December 31, 2022, 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 $287 million and $233 million at June 30, 2023 and December 31, 2022, 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 2023.
Changes in the deferred revenue liabilities are as follows:
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2023 | $ | 508 | |||
| Customer deposits and billings | 1,052 | ||||
| Revenue recognized in the period | (949) | ||||
| Translation | 9 | ||||
| Balance at June 30, 2023 | $ | 620 |
| (In millions) | Deferred Revenue | ||||
| Balance at January 1, 2022 | $ | 422 | |||
| Customer deposits and billings | 742 | ||||
| Revenue recognized in the period | (705) | ||||
| Translation | (15) | ||||
| Balance at June 30, 2022 | $ | 444 |
Deferred revenue liabilities of $604 million and $489 million as of June 30, 2023 and December 31, 2022, 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 June 30, 2023 was approximately $12.5 billion. At June 30, 2023, approximately 82% 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 $39 million and $31 million at June 30, 2023 and December 31, 2022, respectively. 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) | June 30, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 1,458 | $ | 1,275 | |||||||
| Work-in-process | 930 | 781 | |||||||||
| Finished goods | 1,282 | 1,375 | |||||||||
| Total inventory | $ | 3,670 | $ | 3,430 |
Note 6. GOODWILL
Changes in the carrying amount of goodwill by segment are as follows:
| (In millions) | January 1, 2023 | Translation | June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Electrical Americas | $ | 7,402 | $ | 11 | $ | 7,413 | ||||||||||||||||||||||||||||||||||||||
| Electrical Global | 3,929 | 59 | 3,988 | |||||||||||||||||||||||||||||||||||||||||
| Aerospace | 2,844 | 47 | 2,891 | |||||||||||||||||||||||||||||||||||||||||
| Vehicle | 287 | 1 | 289 | |||||||||||||||||||||||||||||||||||||||||
| eMobility | 334 | — | 334 | |||||||||||||||||||||||||||||||||||||||||
| Total | $ | 14,796 | $ | 118 | $ | 14,914 |
Note 7. 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. 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 Consolidated Balance Sheets, and the associated payments are included in operating activities on the Condensed Consolidated Statements of Cash Flows.
The changes in SCF obligations are as follows:
| (In millions) | SCF Obligations | ||||||||||
| Balance at January 1, 2023 | $ | 208 | |||||||||
| Invoices confirmed during the period | 634 | ||||||||||
| Invoices paid during the period | (519) | ||||||||||
| Translation | 13 | ||||||||||
| Balance at June 30, 2023 | $ | 336 |
Note 8. DEBT
On May 18, 2023, Eaton issued senior notes (2023 Notes) with a face amount of $500 million. The 2023 Notes mature in 2028 with interest payable semi-annually at a rate of 4.35% per annum. The issuer received proceeds totaling $497 million from the issuance, net of financing costs. The 2023 Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2023 Notes contain customary optional redemption and par call provisions. The 2023 Notes also contain a provision which upon a change of control requires the Company to make an offer to purchase all or any part of the 2023 Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The 2023 Notes are subject to customary non-financial covenants.
On March 3, 2023, a subsidiary of Eaton issued Euro denominated notes (2023 Euro Notes) in a private issuance with a face value of €300 million ($318 million). The floating rate notes are due June 3, 2024 with interest payable quarterly based on the three-month Euro Interbank Offered Rate plus 25 basis points. The 2023 Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton. The 2023 Euro Notes contain a change of control provision which requires the Company to make an offer to purchase all or any part of the 2023 Euro Notes at a purchase price of 100.5% of the principal amount plus accrued and unpaid interest. The 2023 Euro Notes are subject to customary non-financial covenants.
Note 9. 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 June 30 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Service cost | $ | 5 | $ | 8 | $ | 10 | $ | 14 | $ | — | $ | 1 | |||||||||||||||||||||||
| Interest cost | 35 | 28 | 21 | 12 | 3 | 1 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (49) | (52) | (30) | (29) | — | — | |||||||||||||||||||||||||||||
| Amortization | 1 | 4 | 3 | 12 | (5) | (2) | |||||||||||||||||||||||||||||
| (8) | (12) | 4 | 9 | (2) | — | ||||||||||||||||||||||||||||||
| Settlements | 10 | 17 | — | 1 | — | — | |||||||||||||||||||||||||||||
| Total expense (income) | $ | 2 | $ | 5 | $ | 4 | $ | 10 | $ | (2) | $ | — | |||||||||||||||||||||||
| United States pension benefit expense (income) | Non-United States pension benefit expense (income) | Other postretirement benefits expense (income) | |||||||||||||||||||||||||||||||||
| Six months ended June 30 | |||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||
| Service cost | $ | 10 | $ | 16 | $ | 21 | $ | 30 | $ | — | $ | 1 | |||||||||||||||||||||||
| Interest cost | 71 | 48 | 42 | 24 | 5 | 3 | |||||||||||||||||||||||||||||
| Expected return on plan assets | (98) | (105) | (60) | (60) | — | — | |||||||||||||||||||||||||||||
| Amortization | 2 | 12 | 4 | 24 | (9) | (4) | |||||||||||||||||||||||||||||
| (15) | (29) | 7 | 18 | (3) | — | ||||||||||||||||||||||||||||||
| Settlements | 19 | 31 | 1 | 1 | — | — | |||||||||||||||||||||||||||||
| Total expense (income) | $ | 4 | $ | 2 | $ | 8 | $ | 19 | $ | (3) | $ | — |
The components of retirement benefits expense (income) other than service costs are included in Other expense (income) - net.
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 second quarter and first six months of 2023, the Company recognized settlement losses from lump-sum distributions of $10 million and $20 million, respectively. During the second quarter and first six months of 2022, the Company recognized settlement losses from lump-sum distributions of $18 million and $32 million, respectively. During the second quarter and first six months of 2022, the Company 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 a decrease of $137 million and $90 million in funded status and corresponding increase in Accumulated other comprehensive loss in the second quarter and first six months of 2022, respectively.
Note 10. 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 legal 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 11. INCOME TAXES
The effective income tax rate for the second quarter of 2023 was expense of 17.0% compared to expense of 16.5% for the second quarter of 2022. The effective income tax rate for the first six months of 2023 was expense of 16.6% compared to expense of 15.3% for the first six months of 2022. The increase in the effective tax rate in the second quarter and first six months of 2023 was primarily due to greater levels of income in higher tax jurisdictions.
Note 12. EQUITY
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, 2023 | 397.8 | $ | 4 | $ | 12,512 | $ | 8,468 | $ | (3,946) | $ | (1) | $ | 17,038 | $ | 38 | $ | 17,075 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 638 | — | — | 638 | 1 | 639 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 132 | 132 | — | 132 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid and accrued | — | — | — | (348) | — | — | (348) | (4) | (352) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | 0.7 | — | (11) | (1) | — | 1 | (11) | — | (11) | ||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — | 1 | 1 | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at March 31, 2023 | 398.6 | $ | 4 | $ | 12,502 | $ | 8,757 | $ | (3,814) | $ | — | $ | 17,449 | $ | 36 | $ | 17,485 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 744 | — | — | 744 | 1 | 745 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | 53 | 53 | 53 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — | (344) | — | — | (344) | — | (344) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | 0.4 | — | 52 | (1) | — | (1) | 51 | — | 51 | ||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | — | — | — | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2023 | 399.0 | $ | 4 | $ | 12,554 | $ | 9,156 | $ | (3,760) | $ | (1) | $ | 17,953 | $ | 36 | $ | 17,988 | ||||||||||||||||||||||||||||||||||||
| 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 | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | 601 | — | — | 601 | — | 601 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | (444) | (444) | (444) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash dividends paid | — | — | — | (323) | — | — | (323) | — | (323) | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of shares under equity-based compensation plans | — | — | 26 | 1 | — | — | 27 | — | 27 | ||||||||||||||||||||||||||||||||||||||||||||
| Changes in noncontrolling interest of consolidated subsidiaries - net | — | — | (1) | — | — | — | (1) | — | (1) | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of shares | (0.7) | — | — | (100) | — | — | (100) | — | (100) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | 398.3 | $ | 4 | $ | 12,452 | $ | 7,886 | $ | (3,961) | $ | (1) | $ | 16,380 | $ | 36 | $ | 16,416 | ||||||||||||||||||||||||||||||||||||
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 and six months ended June 30, 2023, no ordinary shares were repurchased. During the three and six months ended June 30, 2022, 0.7 million and 1.3 million ordinary shares, respectively, were repurchased under the 2022 program in the open market at a total cost of $100 million and $186 million, respectively.
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, 2023 | $ | (3,264) | $ | (810) | $ | 129 | $ | (3,946) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | 182 | (19) | 39 | 201 | |||||||||||||||||||
| Amounts reclassified from Accumulated other comprehensive loss (income) | (6) | 15 | (26) | (16) | |||||||||||||||||||
| Net current-period Other comprehensive income (loss) | 176 | (5) | 14 | 185 | |||||||||||||||||||
| Balance at June 30, 2023 | $ | (3,088) | $ | (815) | $ | 143 | $ | (3,760) |
The reclassifications out of Accumulated other comprehensive loss are as follows:
| (In millions) | Six months ended June 30, 2023 | Consolidated Statements of Income classification | |||||||||
| Gains and (losses) on net investment hedges (amount excluded from effectiveness testing) | |||||||||||
| Currency exchange contracts | $ | 6 | Interest expense - net | ||||||||
| Tax expense | — | ||||||||||
| Total, net of tax | 6 | ||||||||||
| Amortization of defined benefits pensions and other postretirement benefits items | |||||||||||
| Actuarial loss and prior service cost | (17) | 1 | |||||||||
| Tax benefit | 2 | ||||||||||
| Total, net of tax | (15) | ||||||||||
| Gains and (losses) on cash flow hedges | |||||||||||
| Floating-to-fixed interest rate swaps | 6 | Interest expense - net | |||||||||
| Currency exchange contracts | 26 | Net sales and Cost of products sold | |||||||||
| Tax expense | (7) | ||||||||||
| Total, net of tax | 26 | ||||||||||
| Total reclassifications for the period | $ | 16 |
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 9 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 June 30 | Six months ended June 30 | ||||||||||||||||||||||
| (In millions except for per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 744 | $ | 601 | $ | 1,382 | $ | 1,133 | |||||||||||||||
| Weighted-average number of ordinary shares outstanding - diluted | 400.7 | 400.7 | 400.6 | 401.2 | |||||||||||||||||||
| Less dilutive effect of equity-based compensation | 1.8 | 1.7 | 1.9 | 2.1 | |||||||||||||||||||
| Weighted-average number of ordinary shares outstanding - basic | 398.9 | 399.0 | 398.7 | 399.1 | |||||||||||||||||||
| Net income per share attributable to Eaton ordinary shareholders | |||||||||||||||||||||||
| Diluted | $ | 1.86 | $ | 1.50 | $ | 3.45 | $ | 2.82 | |||||||||||||||
| Basic | 1.86 | 1.51 | 3.47 | 2.84 |
For the second quarter and first six months of 2023, 0.1 million 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. For the second quarter and first six months 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.
Note 13. 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 | |||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||
| Cash | $ | 353 | $ | 353 | $ | — | $ | — | |||||||||||||||
| Short-term investments | 977 | 977 | — | — | |||||||||||||||||||
| Net derivative contracts | 46 | — | 46 | — | |||||||||||||||||||
| Contingent future payments from acquisition of Green Motion | (46) | — | — | (46) | |||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||
| Cash | $ | 294 | $ | 294 | $ | — | $ | — | |||||||||||||||
| Short-term investments | 261 | 261 | — | — | |||||||||||||||||||
| Net derivative contracts | 29 | — | 29 | — | |||||||||||||||||||
| Contingent future payments from acquisition of Green Motion | (44) | — | — | (44) |
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 an initial estimate of $57 million for the 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 $114 million. As of June 30, 2023, the fair value of the contingent future payments has been reduced to $46 million based primarily on anticipated reductions in projected 2023 revenue compared to the initial estimate.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $9,206 million and fair value of $8,622 million at June 30, 2023 compared to $8,331 million and $7,625 million, respectively, at December 31, 2022. The fair value of Eaton's debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
Note 14. 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 as part of a hedging relationship, is effective and 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 currency exchange contracts and 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). The Company uses the spot rate method to assess hedge effectiveness when currency exchange contracts are used in net investment hedges. Under this method, changes in the spot exchange rate are recognized in Accumulated other comprehensive loss. Changes related to the forward rate are excluded from the hedging relationship and the forward points are amortized to Interest expense - net on a straight-line basis over the term of the contract. The cash flows resulting from these currency exchange contracts are classified in investing activities on the Condensed Consolidated Statements of Cash Flows.
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 | ||||||||||||||||||||||||||||||||||
| June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | 990 | $ | 52 | $ | 2 | $ | 16 | $ | 3 | Cash flow | 1 to 31 months | |||||||||||||||||||||||||||||
| Commodity contracts | 27 | 1 | — | 1 | — | Cash flow | 1 to 12 months | ||||||||||||||||||||||||||||||||||
| Currency exchange contracts | 557 | 3 | — | — | — | Net investment | 3 months | ||||||||||||||||||||||||||||||||||
| Total | $ | 55 | $ | 2 | $ | 17 | $ | 3 | |||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | 4,891 | $ | 19 | $ | 10 | 1 to 7 months | ||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
| Derivatives designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | 1,240 | $ | 35 | $ | 2 | $ | 17 | $ | 9 | Cash flow | 1 to 36 months | |||||||||||||||||||||||||||||
| Commodity contracts | 64 | 4 | — | 2 | — | Cash flow | 1 to 12 months | ||||||||||||||||||||||||||||||||||
| Total | $ | 39 | $ | 2 | $ | 19 | $ | 9 | |||||||||||||||||||||||||||||||||
| Derivatives not designated as hedges | |||||||||||||||||||||||||||||||||||||||||
| Currency exchange contracts | $ | 4,683 | $ | 30 | $ | 14 | 1 to 12 months | ||||||||||||||||||||||||||||||||||
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 Statements of Cash Flows.
Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $3,092 million at June 30, 2023 and $2,711 million at December 31, 2022.
As of June 30, 2023, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
| Commodity | June 30, 2023 | Term | ||||||||||||||||||||||||
| Aluminum | 4 | Millions of pounds | 1 to 11 months | |||||||||||||||||||||||
| Copper | 3 | Millions of pounds | 1 to 7 months | |||||||||||||||||||||||
| Gold | 1,587 | Troy ounces | 1 to 12 months | |||||||||||||||||||||||
| Silver | 289,724 | Troy ounces | 1 to 7 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 | June 30, 2023 | December 31, 2022 | June 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||
| Long-term debt | $ | (713) | $ | (713) | $ | (45) | $ | (48) |
(a) At June 30, 2023 and December 31, 2022, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $45 million and $48 million, respectively.
The impact of cash flow and fair value hedging activities to the Consolidated Statements of Income is as follows:
| Three months ended June 30, 2023 | |||||||||||||||||||||||
| (In millions) | Net Sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | 5,866 | $ | 3,747 | $ | 42 | |||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | |||||||||||||||||||||||
| Hedged item | $ | — | $ | — | $ | (3) | |||||||||||||||||
| Derivative designated as hedging instrument | — | — | 3 | ||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | (1) | $ | (15) | $ | — | |||||||||||||||||
| Derivative designated as hedging instrument | 1 | 15 | — | ||||||||||||||||||||
| Three months ended June 30, 2022 | |||||||||||||||||||||||
| (In millions) | Net Sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | 5,212 | $ | 3,505 | $ | 31 | |||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | 2 | $ | (4) | $ | — | |||||||||||||||||
| Derivative designated as hedging instrument | (2) | 4 | — | ||||||||||||||||||||
| Commodity contracts | |||||||||||||||||||||||
| Hedged item | $ | — | $ | (1) | $ | — | |||||||||||||||||
| Derivative designated as hedging instrument | — | 1 | — | ||||||||||||||||||||
| Six months ended June 30, 2023 | |||||||||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | 11,349 | $ | 7,346 | $ | 91 | |||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | |||||||||||||||||||||||
| Hedged item | $ | — | $ | — | $ | (6) | |||||||||||||||||
| Derivative designated as hedging instrument | — | — | 6 | ||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | 1 | $ | (30) | $ | — | |||||||||||||||||
| Derivative designated as hedging instrument | (1) | 30 | — | ||||||||||||||||||||
| Six months ended June 30, 2022 | |||||||||||||||||||||||
| (In millions) | Net sales | Cost of products sold | Interest expense - net | ||||||||||||||||||||
| Amounts from Consolidated Statements of Income | $ | 10,054 | $ | 6,774 | $ | 63 | |||||||||||||||||
| Gain (loss) on derivatives designated as cash flow hedges | |||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||
| Hedged item | $ | 4 | $ | (7) | $ | — | |||||||||||||||||
| Derivative designated as hedging instrument | (4) | 7 | — | ||||||||||||||||||||
| 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 | $ | — | $ | — | $ | 8 | |||||||||||||||||
| Derivative designated as hedging instrument | — | — | (8) | ||||||||||||||||||||
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 June 30 | |||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||
| Gain (loss) on derivatives not designated as hedges | |||||||||||||||||||||||
| Currency exchange contracts | $ | 6 | $ | (25) | Interest expense - net | ||||||||||||||||||
| Commodity contracts | — | (16) | Other expense (income) - net | ||||||||||||||||||||
| Total | $ | 6 | $ | (41) |
| Gain (loss) recognized in Consolidated Statements of Income | Consolidated Statements of Income classification | ||||||||||||||||||||||
| Six months ended June 30 | |||||||||||||||||||||||
| (In millions) | 2023 | 2022 | |||||||||||||||||||||
| Gain (loss) on derivatives not designated as hedges | |||||||||||||||||||||||
| Currency exchange contracts | $ | 17 | $ | (33) | Interest expense - net | ||||||||||||||||||
| Commodity contracts | — | (15) | Other expense (income) - net and Cost of products sold (a) | ||||||||||||||||||||
| Total | $ | 17 | $ | (48) | |||||||||||||||||||
(a) In the second quarter of 2022, Eaton changed the presentation of gains and losses associated with derivative contracts for commodities that are not designated as hedges from Cost of products sold to Other expense (income) - net on the Consolidated Statements of Income. Prior period amounts have not been reclassified as they are not material.
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 income (loss) | Location of gain (loss) reclassified from Accumulated other comprehensive loss | Gain (loss) reclassified from Accumulated other comprehensive loss | |||||||||||||||||||||||||||
| Three months ended June 30 | Three months ended June 30 | ||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Derivatives designated as cash flow hedges | |||||||||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | $ | 1 | $ | 113 | Interest expense - net | $ | 3 | $ | — | ||||||||||||||||||||
| Currency exchange contracts | 18 | (10) | Net sales and Cost of products sold | 15 | 4 | ||||||||||||||||||||||||
| Commodity contracts | (2) | (12) | Cost of products sold | — | 1 | ||||||||||||||||||||||||
| Derivatives designated as net investment hedges | |||||||||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||||||||
| Effective portion | 32 | — | Gain (loss) on sale of business | — | — | ||||||||||||||||||||||||
| Amount excluded from effectiveness testing | 4 | — | Interest expense - net | 4 | — | ||||||||||||||||||||||||
| Non-derivative designated as net investment hedges | |||||||||||||||||||||||||||||
| Foreign currency denominated debt | (3) | 179 | Gain (loss) on sale of business | — | — | ||||||||||||||||||||||||
| Total | $ | 50 | $ | 270 | $ | 22 | $ | 5 | |||||||||||||||||||||
| Gain (loss) recognized in other comprehensive income (loss) | Location of gain (loss) reclassified from Accumulated other comprehensive loss | Gain (loss) reclassified from Accumulated other comprehensive loss | |||||||||||||||||||||||||||
| Six months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
| Derivatives designated as cash flow hedges | |||||||||||||||||||||||||||||
| Forward starting floating-to-fixed interest rate swaps | $ | 1 | $ | 237 | Interest expense - net | $ | 6 | $ | — | ||||||||||||||||||||
| Currency exchange contracts | 49 | (10) | Net sales and Cost of products sold | 26 | 4 | ||||||||||||||||||||||||
| Commodity contracts | — | (7) | Cost of products sold | — | 2 | ||||||||||||||||||||||||
| Derivatives designated as net investment hedges | |||||||||||||||||||||||||||||
| Currency exchange contracts | |||||||||||||||||||||||||||||
| Effective portion | 18 | — | Gain (loss) on sale of business | — | — | ||||||||||||||||||||||||
| Amount excluded from effectiveness testing | 9 | — | Interest expense - net | 6 | — | ||||||||||||||||||||||||
| Non-derivative designated as net investment hedges | |||||||||||||||||||||||||||||
| Foreign currency denominated debt | (66) | 241 | Gain (loss) on sale of business | — | — | ||||||||||||||||||||||||
| Total | $ | 11 | $ | 461 | $ | 38 | $ | 6 |
The pre-tax portion of the fair value of currency exchange contracts designated as net investment hedges included in Accumulated other comprehensive loss were net gains of $18 million at June 30, 2023. The pre-tax portion of the fair value of the forward points included in Accumulated other comprehensive loss were net gains of $9 million at June 30, 2023.
At June 30, 2023, a gain of $36 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 15. RESTRUCTURING CHARGES
In the second quarter of 2020, Eaton initiated a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to initially respond to declining market conditions brought on by the COVID-19 pandemic. Since the inception of the program, the Company has incurred charges of $364 million. These restructuring activities are expected to be completed in 2023 with total estimated charges of $380 million cumulatively for the entire program. The remaining charges in 2023 are expected to relate primarily to plant closing and other costs.
A summary of restructuring program charges is as follows:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| (In millions except for per share data) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Workforce reductions | $ | 15 | $ | 2 | $ | 17 | $ | 7 | |||||||||||||||
| Plant closing and other | 15 | 8 | 22 | 21 | |||||||||||||||||||
| Total before income taxes | 29 | 10 | 39 | 28 | |||||||||||||||||||
| Income tax benefit | 6 | 2 | 8 | 6 | |||||||||||||||||||
| Total after income taxes | $ | 24 | $ | 8 | $ | 31 | $ | 22 | |||||||||||||||
| Per ordinary share - diluted | $ | 0.06 | $ | 0.02 | $ | 0.08 | $ | 0.05 |
Restructuring program charges related to the following segments:
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||
| Electrical Americas | $ | 1 | $ | 5 | $ | 3 | $ | 10 | |||||||||||||||||||||||||||
| Electrical Global | 14 | 1 | 18 | 6 | |||||||||||||||||||||||||||||||
| Aerospace | 2 | 2 | 3 | 5 | |||||||||||||||||||||||||||||||
| Vehicle | 1 | 3 | 3 | 6 | |||||||||||||||||||||||||||||||
| eMobility | 6 | — | 7 | — | |||||||||||||||||||||||||||||||
| Corporate | 5 | — | 6 | 2 | |||||||||||||||||||||||||||||||
| Total | $ | 29 | $ | 10 | $ | 39 | $ | 28 |
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, net1 | (13) | 47 | 33 | ||||||||||||||
| Payments, utilization and translation | (45) | (51) | (96) | ||||||||||||||
| Balance at December 31, 2022 | 38 | 4 | 41 | ||||||||||||||
| Liability recognized, net | 17 | 22 | 39 | ||||||||||||||
| Payments | (10) | (20) | (30) | ||||||||||||||
| Balance at June 30, 2023 | $ | 45 | $ | 6 | $ | 51 |
1The restructuring program liability was adjusted by $30 million in 2022 related to true-ups for completed workforce reductions and the decision not to close a facility in the Vehicle segment that was previously included in the program.
These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense (income) - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 16 for additional information about business segments.
Note 16. 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. 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 2022 Form 10-K.
| Three months ended June 30 | Six months ended June 30 | ||||||||||||||||||||||
| (In millions) | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Electrical Americas | $ | 2,538 | $ | 2,131 | $ | 4,832 | $ | 4,022 | |||||||||||||||
| Electrical Global | 1,569 | 1,495 | 3,069 | 2,932 | |||||||||||||||||||
| Aerospace | 848 | 742 | 1,650 | 1,459 | |||||||||||||||||||
| Vehicle | 751 | 708 | 1,490 | 1,379 | |||||||||||||||||||
| eMobility | 161 | 136 | 308 | 262 | |||||||||||||||||||
| Total net sales | $ | 5,866 | $ | 5,212 | $ | 11,349 | $ | 10,054 | |||||||||||||||
| Segment operating profit (loss) | |||||||||||||||||||||||
| Electrical Americas | $ | 669 | $ | 495 | $ | 1,194 | $ | 857 | |||||||||||||||
| Electrical Global | 290 | 282 | 564 | 561 | |||||||||||||||||||
| Aerospace | 191 | 163 | 371 | 321 | |||||||||||||||||||
| Vehicle | 115 | 108 | 222 | 221 | |||||||||||||||||||
| eMobility | (1) | (2) | (5) | (5) | |||||||||||||||||||
| Total segment operating profit | 1,264 | 1,046 | 2,346 | 1,955 | |||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Intangible asset amortization expense | (113) | (122) | (237) | (250) | |||||||||||||||||||
| Interest expense - net | (42) | (31) | (91) | (63) | |||||||||||||||||||
| Pension and other postretirement benefits income | 11 | 9 | 22 | 28 | |||||||||||||||||||
| Restructuring program charges | (29) | (10) | (39) | (28) | |||||||||||||||||||
| Other expense - net | (192) | (171) | (340) | (302) | |||||||||||||||||||
| Income before income taxes | 898 | 720 | 1,660 | 1,339 | |||||||||||||||||||
| Income tax expense | 153 | 119 | 276 | 205 | |||||||||||||||||||
| Net income | 745 | 601 | 1,384 | 1,135 | |||||||||||||||||||
| Less net income for noncontrolling interests | (1) | — | (3) | (1) | |||||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 744 | $ | 601 | $ | 1,382 | $ | 1,133 |
Previous: Cover and table of contents · Next: Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.