10-Q 1 etn0630201310-q.htm 10-Q ETN 06.30.2013 10-Q
 
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, 2013
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)
 
 
 
70 Sir John Rogerson's Quay, Dublin 2, Ireland
 
-
(Address of principal executive offices)
 
(Zip Code)
 
 
 
+1 (440) 523-5000
 
 
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not applicable
 
 
 
 
 
 
(Former name, former address and former fiscal year if changed since last report)
 
 
 
 
 
 
 
 
 

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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 473.9 million Ordinary Shares outstanding as of June 30, 2013.
 








PART I — FINANCIAL INFORMATION

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)
2013
 
2012
 
2013
 
2012
Net sales
$
5,602

 
$
4,068

 
$
10,912

 
$
8,028

 
 
 
 
 
 
 
 
Cost of products sold
3,870

 
2,815

 
7,605

 
5,569

Selling and administrative expense
960

 
690

 
1,918

 
1,392

Research and development expense
161

 
106

 
313

 
211

Interest expense - net
71

 
30

 
146

 
58

Other expense (income) - net
6

 
8

 
(4
)
 
11

Income before income taxes
534

 
419

 
934

 
787

Income tax expense
37

 
37

 
57

 
94

Net income
497

 
382

 
877

 
693

Less net income for noncontrolling interests
(3
)
 

 
(5
)
 

Net income attributable to Eaton ordinary shareholders
$
494

 
$
382

 
$
872

 
$
693

 
 
 
 
 
 
 
 
Net income per ordinary share
 
 
 
 
 
 
 
Diluted
$
1.04

 
$
1.12

 
$
1.83

 
$
2.04

Basic
1.04

 
1.13

 
1.84

 
2.06

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
 
 
 
 
Diluted
476.3

 
339.5

 
475.7

 
339.6

Basic
473.4

 
337.0

 
472.6

 
336.2

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.42

 
$
0.38

 
$
0.84

 
$
0.76


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

2


EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three months ended
June 30
 
Six months ended
June 30
(In millions)
2013
 
2012
 
2013
 
2012
Net income
$
497

 
$
382

 
$
877

 
$
693

Less net income for noncontrolling interests
(3
)
 

 
(5
)
 

Net income attributable to Eaton ordinary shareholders
494

 
382

 
872

 
693

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax


 


 


 


Currency translation and related hedging instruments
(109
)
 
(271
)
 
(390
)
 
(99
)
Pensions and other postretirement benefits
36

 
33

 
89

 
71

Cash flow hedges
1

 
(4
)
 
(5
)
 
12

Other comprehensive loss attributable to Eaton
   ordinary shareholders
(72
)
 
(242
)
 
(306
)
 
(16
)
 


 


 


 


Total comprehensive income attributable to Eaton
  ordinary shareholders
$
422

 
$
140

 
$
566

 
$
677


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


3


EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
June 30,
2013
 
December 31,
2012
Assets
 
 
 
Current assets
 
 
 
Cash
$
628

 
$
577

Short-term investments
368

 
527

Accounts receivable - net
3,820

 
3,510

Inventory
2,405

 
2,339

Deferred income taxes
448

 
442

Prepaid expenses and other current assets
560

 
429

Total current assets
8,229

 
7,824

 
 
 
 
Property, plant and equipment - net
3,749

 
3,823

 
 
 
 
Other noncurrent assets

 

Goodwill
14,049

 
14,211

Other intangible assets
7,186

 
7,468

Deferred income taxes
1,169

 
1,254

Other assets
875

 
1,704

Total assets
$
35,257

 
$
36,284

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
115

 
$
757

Current portion of long-term debt
575

 
314

Accounts payable
2,045

 
1,879

Accrued compensation
368

 
463

Other current liabilities
1,878

 
2,057

Total current liabilities
4,981

 
5,470

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
9,069

 
9,762

Pension liabilities
1,805

 
2,004

Other postretirement benefits liabilities
736

 
740

Deferred income taxes
2,301

 
2,341

Other noncurrent liabilities
934

 
812

Total noncurrent liabilities
14,845

 
15,659

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
15,388

 
15,113

Noncontrolling interests
43

 
42

Total equity
15,431

 
15,155

Total liabilities and equity
$
35,257

 
$
36,284


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

4


EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Six months ended
June 30
(In millions)
2013
 
2012
Operating activities
 
 
 
Net income
$
877

 
$
693

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
490

 
278

Pension expense
148

 
136

Contributions to pension plans
(244
)
 
(355
)
Contributions to other postretirement benefits plans
(29
)
 
(35
)
Changes in working capital
(647
)
 
(444
)
Other - net
114

 
98

Net cash provided by operating activities
709

 
371

 
 
 
 
Investing activities
 
 
 
Cash paid for acquisitions of businesses
(11
)
 
(365
)
Capital expenditures for property, plant and equipment
(251
)
 
(231
)
Sales of short-term investments - net
148

 
35

Proceeds from sale of business
761

 
3

Other - net
(41
)
 
(24
)
Net cash provided by (used in) investing activities
606

 
(582
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
28

 
600

Payments on borrowings
(977
)
 
(18
)
Cash dividends paid
(397
)
 
(255
)
Exercise of employee stock options
78

 
44

Excess tax benefit from equity-based compensation
22

 
21

Other - net
(4
)
 
(47
)
Net cash (used in) provided by financing activities
(1,250
)
 
345

 
 
 
 
Effect of currency on cash
(14
)
 
6

Total increase in cash
51

 
140

Cash at the beginning of the period
577

 
385

Cash at the end of the period
$
628

 
$
525


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

5


EATON CORPORATION plc
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1.
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or 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 generally accepted accounting principles 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 2012 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 Exchange Commission.
During the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments include Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper Industries plc (Cooper) electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). See Note 13 for additional information related to these segments.
During the second quarter of 2013, Eaton made adjustments to the purchase price allocation related to the acquisition of Cooper. These adjustments have been reflected in the Condensed Consolidated Balance Sheet at December 31, 2012. The Company did not revise the Consolidated Statement of Income for the year ended December 31, 2012, as any adjustment was considered immaterial. See Note 2 for additional information related to the acquisition Cooper.
Certain prior year amounts have been reclassified to conform to the current year presentation.

Note 2.
ACQUISITIONS AND SALE OF BUSINESSES
In 2012, Eaton acquired businesses in separate transactions. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions. These transactions and the related annual sales prior to acquisition are summarized below:
Acquired businesses
 
Date of
transaction
 
Business
segment
 
Annual sales
Cooper Industries plc
 
November 30,
2012
 
Electrical Products;
Electrical Systems and Services
 
$5,409
for 2011
A diversified global manufacturer of electrical products and systems, with brands including Bussmann electrical and electronic fuses; Crouse-Hinds and CEAG explosion-proof electrical equipment; Halo and Metalux lighting fixtures; and Kyle and McGraw-Edison power systems products.
 
 
 
 
 
 
 
 
 
 
Rolec Comercial e Industrial S.A.
 
September 28,
2012
 
Electrical Systems and Services
 
$85 for the
12 months
ended
September 30,
2012
A Chilean manufacturer of integrated power assemblies and low- and medium-voltage switchgear, and a provider of engineering services serving mining and other heavy industrial applications in Chile and Peru.
 
 
 
 
 
 
 
 
 
 
Jeil Hydraulics Co., Ltd.
 
July 6,
2012
 
Hydraulics
 
$189
for 2011
A Korean manufacturer of track drive motors, swing drive motors, main control valves and remote control valves for the construction equipment market.
 
 
 
 
 
 
 
 
 
 
Polimer Kaucuk Sanayi ve Pazarlama A.S.
 
June 1,
2012
 
Hydraulics
 
$335
for 2011
A Turkish manufacturer of hydraulic and industrial hose for construction, mining, agriculture, oil and gas, manufacturing, food and beverage, and chemicals markets. This business sells its products under the SEL brand name.
 
 
 
 
 
 
 
 
 
 
Gycom Electrical Low-Voltage Power Distribution, Control and Automation
 
June 1,
2012
 
Electrical Systems and Services
 
$24
for 2011
A Swedish electrical low-voltage power distribution, control and automation components business.
 
 
 

6


Cooper Industries plc
On November 30, 2012, Eaton Corporation acquired Cooper for a purchase price of $13,192. The acquisition of Cooper has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. For accounting purposes, Eaton has been treated as the acquirer in the transaction.
The purchase price allocation below represents Cooper's opening balance sheet on November 30, 2012 which was initially reported in the Form 10-K for the year ended December 31, 2012. During the quarter ended June 30, 2013, opening balance sheet adjustments have been made to update Eaton's preliminary estimates primarily related to intangible assets, goodwill, certain property values and the related deferred tax impact. These adjustments have been reflected in the December 31, 2012 Condensed Consolidated Balance Sheet.
 
November 30,
2012
(as previously
reported)
 
Adjustments
 
November 30,
2012
(as adjusted)
Working capital accounts (1)
$
2,314

 
$
(10
)
 
$
2,304

Prepaid expenses and other current assets
339

 
(11
)
 
328

Property, plant and equipment
940

 
(55
)
 
885

Investment in Apex Tool Group, LLC
800

 
7

 
807

Intangible assets
4,577

 
673

 
5,250

Other assets
35

 

 
35

Debt
(1,221
)
 

 
(1,221
)
Accounts payable
(519
)
 

 
(519
)
Other current liabilities
(634
)
 
(39
)
 
(673
)
Deferred taxes and other noncurrent liabilities
(1,943
)
 
(366
)
 
(2,309
)
Total identifiable net assets
4,688

 
199

 
4,887

Goodwill
8,504

 
(199
)
 
8,305

Total consideration
$
13,192

 
$

 
$
13,192

 
 
 
 
 
 
(1) Working capital accounts include Cash, Short-term investments, Accounts receivable and Inventory.
 
 
 
 
The purchase price allocation for Cooper continues to be evaluated. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price adjustments will be recorded. Fair value estimates are based on a complex series of judgments about future events and uncertainties and rely heavily on estimates and assumptions. The finalization of the purchase accounting assessment will result in changes in the valuation of assets acquired and liabilities assumed and may have a material impact on the Company's results of operations and financial position.
Goodwill has been allocated to the Electrical Products and Electrical Systems and Services segments. The goodwill recognized is calculated as the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. See Note 4 for additional information about goodwill.
Sale of Apex Tool Group, LLC
In July 2010, Cooper formed a joint venture, named Apex Tool Group, LLC (Apex), with Danaher Corporation (Danaher). Apex was formed by combining Cooper’s tools business with certain tools businesses from Danaher’s Tools and Components segment. Cooper and Danaher each owned a 50% interest in the joint venture, had equal representation on its board of directors and had a 50% voting interest in the joint venture.
On October 10, 2012, Cooper and Danaher announced they had entered into a definitive agreement to sell Apex to Bain Capital for approximately $1.6 billion subject to post-closing adjustments. On February 1, 2013, the sale of Apex was completed.


7


Note 3.
ACQUISITION INTEGRATION AND RESTRUCTURING CHARGES
Eaton incurs integration charges and transaction costs related to acquired businesses. A summary of these charges follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2013
 
2012
 
2013
 
2012
Acquisition integration charges
 
 
 
 
 
 
 
Electrical Products
$
12

 
$

 
$
15

 
$

Electrical Systems and Services
11

 
5

 
16

 
7

Hydraulics
8

 
3

 
20

 
4

Total business segments
31

 
8

 
51

 
11

Corporate
6

 
1

 
12

 
1

Total acquisition integration charges
$
37

 
$
9

 
$
63

 
$
12

 
 
 
 
 
 
 
 
Transaction costs
 
 
 
 
 
 
 
Corporate
$
2

 
$
7

 
$
7

 
$
7

Total transaction costs
$
2

 
$
7

 
$
7

 
$
7

 
 
 
 
 
 
 
 
Total acquisition integration charges and transaction costs before
   income taxes
$
39

 
$
16

 
$
70

 
$
19

Total after income taxes
$
25

 
$
10

 
$
47

 
$
12

Per ordinary share - diluted
$
0.05

 
$
0.03

 
$
0.10

 
$
0.04

Business segment integration charges in 2013 were related primarily to the integrations of Cooper, Polimer Kaucuk Sanayi ve Pazarlama, Jeil Hydraulics and Rolec Comercial e Industrial. Business segment integration charges in 2012 were related primarily to the integrations of E. Begerow GmbH & Co. KG and Internormen Technology Group. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information the charges reduced Operating profit of the related business segment.
Corporate integration charges in 2013 and 2012 were related primarily to the integration of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information the charges were included in Other corporate expense - net.
Acquisition-related transaction costs, such as investment banking, legal, and other professional fees are not included as a component of consideration transferred in an acquisition but are expensed as incurred. Acquisition related transaction costs in 2013 and 2012 were related to the acquisition of Cooper. These charges were included in Selling and administrative expense, Interest expense - net and Other corporate expense - net, as appropriate. In Business Segment Information the charges were included in Interest expense - net and Other corporate expense - net.
See Note 2 for additional information about business acquisitions.
Restructuring Charges
During the fourth quarter of 2012, Eaton undertook restructuring activities to improve the efficiency of certain businesses. These actions resulted in a charge in the fourth quarter of 2012 of $50, comprised of severance costs totaling $34 and other non-cash expenses totaling $16
During the first half of 2013, Eaton undertook restructuring activities related to the acquisition and integration of Cooper in an effort to gain efficiencies in selling, marketing, traditional back-office functions and manufacturing and distribution. These actions resulted in charges totaling $17, comprised primarily of severance costs, and are included in the table above in acquisition integration charges. These restructuring initiatives are expected to continue through the second half of 2013.
Restructuring charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments. As of June 30, 2013, the liabilities related to restructuring actions totaled $36.



8


Note 4.
GOODWILL
A summary of goodwill follows:
 
June 30,
2013
 
December 31,
2012
Electrical Products
$
5,787

 
$
5,874

Electrical Systems and Services
5,486

 
5,531

Hydraulics
1,383

 
1,404

Aerospace
1,038

 
1,045

Vehicle
355

 
357

Total goodwill
$
14,049

 
$
14,211

During the second quarter ended June 30, 2013, purchase price allocation adjustments related to the acquisition of Cooper resulted in retrospective adjustments to goodwill for Electrical Products and Electrical Systems and Services at December 31, 2012. See Note 2 for additional information related to purchase price allocation adjustments.
The decrease in total goodwill in 2013 was related to the impact of currency translation.

Note 5.
DEBT
On November 30, 2012, the closing date of the acquisition of Cooper, Eaton borrowed $1,669 on a $6.75 billion, 364-day bridge facility (the Facility) which was obtained on May 21, 2012. The Facility was obtained to finance a portion of the cash paid to acquire Cooper and was available in a single draw on the closing date of the acquisition. On February 1, 2013, Eaton repaid the outstanding balance on the Facility.

Note 6.
RETIREMENT BENEFITS PLANS
The components of retirement benefits expense follow:
 
Three months ended June 30
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
32

 
$
29

 
$
15

 
$
12

 
$
5

 
$
4

Interest cost
37

 
33

 
19

 
19

 
8

 
10

Expected return on plan assets
(56
)
 
(45
)
 
(21
)
 
(19
)
 
(1
)
 
(2
)
Amortization
33

 
29

 
7

 
4

 
4

 
3


46

 
46

 
20

 
16

 
16

 
15

Settlement loss
10

 
5

 

 

 

 

Total expense
$
56

 
$
51

 
$
20

 
$
16

 
$
16

 
$
15

 
Six months ended June 30
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Service cost
$
64

 
$
58

 
$
30

 
$
24

 
$
10

 
$
8

Interest cost
74

 
67

 
39

 
38

 
17

 
19

Expected return on plan assets
(113
)
 
(90
)
 
(42
)
 
(38
)
 
(3
)
 
(3
)
Amortization
66

 
58

 
14

 
8

 
7

 
7

 
91

 
93

 
41

 
32

 
31

 
31

Settlement loss
16

 
9

 

 
2

 

 

Total expense
$
107

 
$
102

 
$
41

 
$
34

 
$
31

 
$
31



9


Note 7.
LEGAL CONTINGENCIES
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries (including asbestos claims), antitrust matters and employment-related matters. 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 consolidated financial statements.
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. This judgment is based on an alleged violation of an agency agreement between Raysul and Saturnia. At June 30, 2013, the Company has a total accrual of 71 Brazilian Reais related to this matter ($32 based on current exchange rates), comprised of 60 Brazilian Reais recognized in the fourth quarter of 2010 ($27 based on current exchange rates) with an additional 11 Brazilian Reais recognized through June 30, 2013 ($5 based on current exchange rates). In 2010, Eaton filed motions for clarification with the Brazilian court of appeals which were denied on April 6, 2011. Eaton Holding and Eaton Ltda. filed appeals on various issues to the Superior Court of Justice in Brasilia. In April 2013, the Superior Court of Justice ruled in favor of Raysul. Additional motions for clarification have been filed with the Superior Court of Justice in Brasilia and an additional appeal is being considered. The Company expects that any sum it may be required to pay in connection with this matter will not exceed the amount of the recorded liability.
On October 5, 2006, ZF Meritor LLC and Meritor Transmission Corporation (collectively, Meritor) filed an action against Eaton in the United States District Court for Delaware. The action sought damages, which would be trebled under United States antitrust laws, as well as injunctive relief and costs. The suit alleged that Eaton engaged in anti-competitive conduct against Meritor in the sale of heavy-duty truck transmissions in North America. Following a four week trial on liability only, on October 8, 2009, the jury returned a verdict in favor of Meritor. Eaton firmly believes that it competes fairly and honestly for business in the marketplace, and that at no time did it act in an anti-competitive manner. During an earlier stage in the case, the judge concluded that damage estimates contained in a report filed by Meritor were not based on reliable data and the report was specifically excluded from the case. On November 3, 2009, Eaton filed a motion for judgment as a matter of law and to set aside the verdict. That motion was denied on March 10, 2011. On March 14, 2011, Eaton filed a motion for entry of final judgment of liability, zero damages and no injunctive relief. That motion was denied on June 9, 2011. On August 19, 2011, the Court entered final judgment of liability but awarded zero damages to plaintiffs. The Court also entered an injunction prohibiting Eaton from offering rebates or other incentives based on purchasing targets but stayed the injunction pending appeal. Eaton appealed the liability finding and the injunction to the Third Circuit Court of Appeals. Meritor cross-appealed the finding of zero damages. On September 28, 2012, the Court of Appeals affirmed the District Court's denial of Eaton's motion for judgment as a matter of law, and let stand the jury verdict in favor of Meritor. The Third Circuit also ruled that the plaintiffs' damages report was properly excluded, but reversed the judgment of zero damages and ordered that the District Court must allow plaintiffs a limited opportunity to amend the damages report, which may be re-considered for reliability and admissibility. Injunctive relief also was vacated. An estimate of any potential loss related to this action cannot be made at this time.

Note 8.
INCOME TAXES
The effective income tax rate for the second quarter of 2013 was 7.0% compared to 8.7% for the second quarter of 2012 and 6.1% for the first six months of 2013 compared to 11.9% for the first six months of 2012. The lower effective tax rate in the second quarter of 2013 was primarily attributable to the reinstatement in 2013 of the U.S. research and experimentation credit, and the effects of the Cooper transaction and integration. The lower effective tax rate in the first six months of 2013 was attributable to the items noted above, the recording of the entire 2012 U.S. research and experimentation credit in the first quarter of 2013, and enhanced utilization of foreign tax credits in the U.S.
At the end of the fourth quarter of 2011, the IRS issued a Statutory Notice of Deficiency (Notice) for Eaton's 2005 and 2006 tax years. The Notice proposes assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the U.S., net of agreed credits and deductions. The Company has set its transfer prices for products sold between these affiliates at the same prices that the Company sells such products to third parties. The Notice was issued despite the IRS having previously recognized the validity of the Company's transfer pricing methodology by entering into two successive binding Advance Pricing Agreements (APAs) that approved and, in fact, required the application of the Company's transfer pricing methodology for the ten year period of 2001 through 2010. For the years 2001 through 2004, the IRS had previously accepted the transfer pricing methodology related to these APAs after a comprehensive review conducted in two separate audit cycles. On December 16, 2011, immediately prior to the Notice being issued, the IRS sent a letter stating that it was canceling the APAs.

10


The Company firmly believes that the proposed assessments are without merit. The Company also believes that it was in full compliance with the terms of the two APAs, and that the IRS's unilateral attempt to retroactively cancel these two binding contracts is also without merit, and represents a breach of the two contracts. On February 29, 2012, the Company filed a Petition with the U.S Tax Court in which it asserted that the transfer pricing established in the two APA contracts meets the arms-length standard set by the U.S. income tax laws, and accordingly, that the two APA contracts should be enforced in accordance with their terms. On June 11, 2012, the Company filed a motion for partial summary judgment with the U.S. Tax Court, asking the U.S. Tax Court to find that the APAs are binding contracts and that the IRS has the burden of proof to substantiate cancellation of the APAs. On June 26, 2013, the U.S. Tax Court ruled that the IRS has the discretion to unilaterally cancel an APA and that the taxpayer bears the burden of proving that the IRS abused that discretion. While the Company disagrees with the Tax Court's ruling, the Company remains confident that it will be able to demonstrate that it was in full compliance with the APAs and that the IRS abused its discretion in canceling the APAs after their terms expired. In addition, the Company continues to believe the transfer pricing methodology contained in the APAs is correct. The Company believes that the ultimate resolution of this matter will not have a material impact on the consolidated financial statements.

Note 9.
EQUITY
The changes in Shareholders’ equity follow:
 
Eaton
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2012
$
15,113

 
$
42

 
$
15,155

Net income
872

 
5

 
877

Other comprehensive loss
(306
)
 

 
(306
)
Cash dividends paid
(397
)
 
(4
)
 
(401
)
Issuance of shares under equity-based compensation plans - net
106

 

 
106

Balance at June 30, 2013
$
15,388

 
$
43

 
$
15,431

The changes in Accumulated other comprehensive loss follow:
 
Currency translation and related hedging instruments
 
Pensions and other postretirement benefits
 
Cash flow
hedges
 
Total
Balance at December 31, 2012
$
(367
)
 
$
(1,599
)
 
$
2

 
$
(1,964
)
Other comprehensive (loss) income
    before reclassifications
(390
)
 
23

 
(6
)
 
(373
)
Amounts reclassified from Accumulated other
   comprehensive (loss) income

 
66

 
1

 
67

Net current-period other comprehensive
   (loss) income
(390
)
 
89

 
(5
)
 
(306
)
Balance at June 30, 2013
$
(757
)
 
$
(1,510
)
 
$
(3
)
 
$
(2,270
)

11


The reclassifications out of Accumulated other comprehensive loss follow:
 
 
Six months ended
June 30, 2013
 
Consolidated Statements of
Income classification
Amortization of defined benefit pension items
 
 
 
 
Actuarial loss
 
$
(103
)
 
1 
 
 
(103
)
 
 
Tax benefit
 
37

 
 
Total, net of tax
 
(66
)
 
 
 
 
 
 
 
Gains and losses on cash flow hedges
 
 
 
 
Floating-to-fixed interest rate swaps
 
(1
)
 
Interest expense - net
Currency exchange contracts
 
1

 
Cost of products sold
Commodity contracts
 
(1
)
 
Cost of products sold
 
 
(1
)
 
 
Tax expense
 

 
 
Total, net of tax
 
(1
)
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(67
)
 
 
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic pension cost. See Note 6 for additional information about defined benefit pension items.
Net Income per Ordinary Share
A summary of the calculation of net income per ordinary share attributable to shareholders follows:
 
Three months ended
June 30
 
Six months ended
June 30
(Shares in millions)
2013
 
2012
 
2013
 
2012
Net income attributable to Eaton ordinary shareholders
$
494

 
$
382

 
$
872

 
$
693

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
476.3

 
339.5

 
475.7

 
339.6

Less dilutive effect of equity-based compensation
2.9

 
2.5

 
3.1

 
3.4

Weighted-average number of ordinary shares outstanding - basic
473.4

 
337.0

 
472.6

 
336.2

 
 
 
 
 
 
 
 
Net income per ordinary share
 
 
 
 
 
 
 
Diluted
$
1.04

 
$
1.12

 
$
1.83

 
$
2.04

Basic
1.04

 
1.13

 
1.84

 
2.06

For the second quarter and the first six months of 2013, 0.2 million and 0.1 million stock options, respectively, were excluded from the calculation of diluted net income per ordinary share 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 the first six months of 2012, 2.4 million and 1.7 million stock options, respectively, were excluded from the calculation of diluted net income per ordinary share 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.


12


Note 10.
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 recognized at fair value, and the fair value measurements used, follows:
 
Total
 
Quoted prices
in active
markets for
identical assets
(Level 1)
 
Other
observable
inputs
(Level 2)
 
Unobservable
inputs
(Level 3)
June 30, 2013
 
 
 
 
 
 
 
Cash
$
628

 
$
628

 
$

 
$

Short-term investments
368

 
368

 

 

Net derivative contracts
(13
)
 

 
(13
)
 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(1
)
 

 
(1
)
 

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Cash
$
577

 
$
577

 
$

 
$

Short-term investments
527

 
527

 

 

Net derivative contracts
83

 

 
83

 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
87

 

 
87

 

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. No financial instruments were recognized using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $9,644 and fair value of $9,821 at June 30, 2013 compared to $10,076 and $10,793, respectively, at December 31, 2012. 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.


13


Note 11.
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, to a lesser extent, 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 Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:
Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.
Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) 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 effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income (loss) 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 that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.
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 currency and certain commodity contracts that arise in the normal course of business. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.
Eaton uses certain of its debt denominated in various currencies to hedge portions of its net investments in foreign operations against currency exposure (net investment hedges). Debt denominated in various currencies and designated as non-derivative net investment hedging instruments was $101 and $116 at June 30, 2013 and December 31, 2012, respectively.

14


Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:
 
Notional
amount
 
Other
 current
assets
 
Other
long-term
assets
 
Other
current
liabilities
 
Other
long-term
liabilities
 
Type of
hedge
 
Term
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
2,390

 
$
2

 
$
43

 
$

 
$
46

 
Fair value
 
9 months to 21 years
Floating-to-fixed interest rate swaps
300

 

 

 
1

 

 
Cash flow
 
1 year
Currency exchange contracts
442

 
4

 

 
9

 

 
Cash flow
 
12 to 36 months
Commodity contracts
1

 

 

 

 

 
Cash flow
 
12 months
Total
 
 
$
6

 
$
43

 
$
10

 
$
46

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,165

 
$
29

 
 
 
$
35

 
 
 
 
 
12 months
Commodity contracts
2

 

 
 
 

 
 
 
 
 
12 months
Total
 
 
$
29

 
 
 
$
35

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
1,290

 
$
2

 
$
85

 
$

 
$

 
Fair value
 
6 months to 21 years
Floating-to-fixed interest rate swaps
300

 

 

 

 
2

 
Cash flow
 
1 year
Currency exchange contracts
451

 
9

 

 
4

 

 
Cash flow
 
12 to 36 months
Commodity contracts
17

 

 

 

 

 
Cash flow
 
12 months
Total
 
 
$
11

 
$
85

 
$
4

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,997

 
$
23

 
 
 
$
31

 
 
 
 
 
12 months
Commodity contracts
19

 
1

 
 
 

 
 
 
 
 
12 months
Total
 
 
$
24

 
 
 
$
31

 
 
 
 
 
 
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 sales 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.

15


Amounts recognized in Accumulated other comprehensive income (loss) follow:
 
Three months ended June 30
 
2013
 
2012
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
Floating-to-fixed interest rate swaps
$

 
$
(1
)
 
$
(1
)
 
$
(1
)
Currency exchange contracts
1

 

 
(3
)
 
1

Commodity contracts
(1
)
 
(1
)
 
(4
)
 
(2
)
Total
$

 
$
(2
)
 
$
(8
)
 
$
(2
)
 
Six months ended June 30
 
2013
 
2012
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
recognized in
Accumulated
other
comprehensive
income (loss)
 
Gain (loss)
reclassified
from
Accumulated
other
comprehensive
income (loss)
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
Floating-to-fixed interest rate swaps
$

 
$
(1
)
 
$
(2
)
 
$
(1
)
Foreign currency exchange contracts
(8
)
 
1

 
6

 
(1
)
Commodity contracts
(1
)
 
(1
)
 

 
(4
)
Total
$
(9
)
 
$
(1
)
 
$
4

 
$
(6
)
Gains and losses reclassified from Accumulated other comprehensive income (loss) to the Consolidated Statements of Income were recognized in Cost of products sold.
Amounts recognized in net income follow:
 
Three months ended
June 30
 
Six months ended
June 30
 
2013
 
2012
 
2013
 
2012
Derivatives designated as fair value hedges
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
(80
)
 
$
24

 
$
(88
)
 
$
14

Related long-term debt converted to floating interest
   rates by interest rate swaps
80

 
(24
)
 
88

 
(14
)
 
$

 
$

 
$

 
$

Gains and losses described above were recognized in Interest expense - net.


16


Note 12.
INVENTORY
The components of inventory follow:
 
June 30,
2013
 
December 31,
2012
Raw materials
$
978

 
$
919

Work-in-process
421

 
424

Finished goods
1,127

 
1,129

Inventory at FIFO
2,526

 
2,472

Excess of FIFO over LIFO cost
(121
)
 
(133
)
Total inventory
$
2,405

 
$
2,339


Note 13.
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.
During the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments are Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). Previously reported segment financial information has been updated for all periods reported.
Electrical Products consists of electrical components, industrial controls, residential products, single phase power quality, emergency lighting, fire detection, wiring devices, structural support systems, circuit protection, and lighting products.
Electrical Systems and Services consists of power distribution and assemblies, three phase power quality, hazardous duty electrical equipment, intrinsically safe explosion-proof instrumentation, utility power distribution, power reliability equipment, and services.

17


 
Three months ended
June 30
 
Six months ended
June 30
 
2013
 
2012
 
2013
 
2012
Net sales
 
 
 
 
 
 
 
Electrical Products
$
1,758

 
$
903

 
$
3,418

 
$
1,789

Electrical Systems and Services
1,624

 
913

 
3,145

 
1,765

Hydraulics
772

 
769

 
1,528

 
1,504

Aerospace
446

 
436

 
880

 
866

Vehicle
1,002

 
1,047

 
1,941

 
2,104

Total net sales
$
5,602

 
$
4,068

 
$
10,912

 
$
8,028

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Electrical Products
$
272

 
$
151

 
$
513

 
$
290

Electrical Systems and Services
227

 
91

 
437

 
167

Hydraulics
104

 
123

 
182

 
232

Aerospace
67

 
59

 
129

 
119

Vehicle
172

 
168

 
304

 
328

Total segment operating profit
842

 
592

 
1,565

 
1,136

 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
Amortization of intangible assets
(108
)
 
(42
)
 
(215
)
 
(84
)
Interest expense - net
(71
)
 
(30
)
 
(146
)
 
(58
)
Pension and other postretirement benefits expense
(43
)
 
(39
)
 
(81
)
 
(80
)
Inventory step-up adjustment
(1
)
 
(1
)
 
(34
)
 
(3
)
Other corporate expense - net
(85
)
 
(61
)
 
(155
)
 
(124
)
Income before income taxes
534

 
419

 
934

 
787

Income tax expense
37

 
37

 
57

 
94

Net income
497

 
382

 
877

 
693

Less net income for noncontrolling interests
(3
)
 

 
(5
)
 

Net income attributable to Eaton ordinary shareholders
$
494

 
$
382

 
$
872

 
$
693

Business segment operating profit was reduced by acquisition integration charges as follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2013
 
2012
 
2013
 
2012
Electrical Products
$
12

 
$

 
$
15

 
$

Electrical Systems and Services
11

 
5

 
16

 
7

Hydraulics
8

 
3

 
20

 
4

Total
$
31

 
$
8

 
$
51

 
$
11

Corporate acquisition integration charges totaled $6 and $12 for the second quarter and the first six months of 2013, respectively, and $1 for both the second quarter and the first six months of 2012. Corporate acquisition integration charges related primarily to the acquisition of Cooper and are included above in Other corporate expense - net.
Acquisition-related transaction costs, such as investment banking, legal and other professional fees are included above in Interest expense - net and Other corporate expense - net and are related to the acquisition of Cooper. These charges totaled $2 and $7 for the second quarter and the first six months of 2013, respectively, and $7 for both the second quarter and the first six months of 2012. See Note 3 for additional information about acquisition integration charges and transaction costs.
For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2012 Form 10-K.


18


ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).

COMPANY OVERVIEW
Eaton Corporation plc (Eaton or Company) is a diversified power management company providing energy-efficient solutions that help its customers effectively manage electrical, hydraulic and mechanical power. With 2012 net sales of $16.3 billion, the Company is a global technology leader in electrical products, systems and services for power quality, distribution and control, power transmission, lighting and wiring products; hydraulics components, systems and services for industrial and mobile equipment; aerospace fuel, hydraulics and pneumatic systems for commercial and military use; and truck and automotive drivetrain and powertrain systems for performance, fuel economy and safety. Eaton has approximately 102,000 employees in over 60 countries, and sells products to customers in more than 175 countries.
In 2012, Eaton acquired certain businesses that affect comparability on a year over year basis, the most substantial of which was Cooper Industries plc (Cooper). Cooper was acquired November 30, 2012 for a purchase price of $13,192. See Note 2 in the 2012 Form 10-K for additional information on the acquisition of Cooper. The Consolidated Statements of Income include the results of these businesses from the dates of the transactions or formation. For a complete list of business acquisitions impacting the comparative periods, see Note 2 to the Condensed Consolidated Financial Statements.
The acquisition of Cooper has significantly transformed Eaton's mix of businesses. As a result, during the first quarter of 2013, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segments are Electrical Products and Electrical Systems and Services (which include legacy Eaton and former Cooper electrical businesses), and Vehicle (which includes truck and automotive drivetrain and powertrain systems businesses). For those reportable segments that were re-segmented, previously reported segment financial information has been updated for all periods reported in 2012 and 2011. See Note 13 to the Condensed Consolidated Financial Statements contained in the Form 10-Q for the quarterly period ending March 31, 2013. For additional information regarding the re-segmentation, see Note 13 to the Condensed Consolidated Financial Statements. The re-segmentation did not impact previously reported consolidated results of operations. For additional information regarding Eaton’s business segments, see Note 14 to the Consolidated Financial Statements contained in the 2012 Form 10-K.

Summary of Results of Operations
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per ordinary share-diluted follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2013
 
2012
 
2013
 
2012
Net sales
$
5,602

 
$
4,068

 
$
10,912

 
$
8,028

Net income attributable to Eaton ordinary shareholders
494

 
382

 
872

 
693

Net income per ordinary share-diluted
$
1.04

 
$
1.12

 
$
1.83

 
$
2.04


RESULTS OF OPERATIONS
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per ordinary share, and operating profit before acquisition integration charges for each business segment, as well as corporate expense, each of which excludes amounts that differ from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in the table below and in the discussion of the operating results of each business segment. Management believes that these financial measures are useful to investors because they exclude transactions of an unusual nature, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment. For additional information on acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.

19


Consolidated Financial Results
 
Three months ended
June 30
 
Increase
(decrease)
 
Six months ended
June 30
 
Increase
(decrease)
 
2013
 
2012
 
 
2013
 
2012
 
Net sales
$
5,602

 
$
4,068

 
38
 %
 
$
10,912

 
$
8,028

 
36
 %
Gross profit
1,732

 
1,253

 
38
 %
 
3,307

 
2,459

 
34
 %
Percent of net sales
30.9
%
 
30.8
%
 
 
 
30.3
%
 
30.6
%
 
 
Income before income taxes
534

 
419

 
27
 %
 
934

 
787

 
19
 %
Net income
$
497

 
$
382

 
30
 %
 
$
877

 
$
693

 
27
 %
Less net income for noncontrolling interests
(3
)
 

 
 
 
(5
)
 

 
 
Net income attributable to Eaton
   ordinary shareholders
494

 
382

 
29
 %
 
872

 
693

 
26
 %
Excluding acquisition integration charges
   and transaction costs (after-tax)
25

 
10

 
 
 
47

 
12

 
 
Operating earnings
$
519

 
$
392

 
32
 %
 
$
919

 
$
705

 
30
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net income per ordinary share-diluted
$
1.04

 
$
1.12

 
(7
)%
 
$
1.83

 
$
2.04

 
(10
)%
Excluding per share impact of acquisition
   integration charges and transaction
      costs (after-tax)
0.05

 
0.03

 
 
 
0.10

 
0.04

 
 
Operating earnings per ordinary share
$
1.09

 
$
1.15

 
(5
)%
 
$
1.93

 
$
2.08

 
(7
)%
Net Sales
Net sales in the second quarter of 2013 increased 38% compared to the second quarter of 2012 due to an increase of 40% from the acquisition of businesses, partially offset by a decrease of 2% in core sales. Net sales in the first six months of 2013 increased 36% compared to the first six months of 2012 due to an increase of 40% from the acquisitions of businesses, partially offset by a decrease of 3% in core sales and a decrease of 1% from the impact of currency translation. The decrease in core sales in both the second quarter and the first six months of 2013 reflects soft end markets due to a continuation of the subdued global economic conditions experienced during the second half of 2012 and the first quarter of 2013. Eaton now anticipates that its end markets for 2013 will grow 1%.
Gross Profit
The gross profit margin remained relatively consistent for the second quarter and the first six months of 2013 as compared to the same periods of 2012 due to productivity efficiencies, offset by lower core sales due to continued subdued global economic conditions, as noted above.
Income Taxes
The effective income tax rate for the second quarter of 2013 was 7.0% compared to 8.7% for the second quarter of 2012 and 6.1% for the first six months of 2013 compared to 11.9% for the first six months of 2012. The lower effective tax rate in the second quarter of 2013 was primarily attributable to the reinstatement in 2013 of the U.S. research and experimentation credit, and the effects of the Cooper transaction and integration. The lower effective tax rate in the first six months of 2013 was attributable to the items noted above, the recording of the entire 2012 U.S. research and experimentation credit in the first quarter, and enhanced utilization of foreign tax credits in the U.S.

20


Net Income
Net income attributable to Eaton ordinary shareholders of $494 in the second quarter of 2013 increased 29% compared to Net income attributable to Eaton ordinary shareholders of $382 in the second quarter of 2012. Net income per ordinary share of $1.04 in the second quarter of 2013 decreased 7% from Net income per ordinary share of $1.12 in the second quarter of 2012. Net income attributable to Eaton ordinary shareholders of $872 in the first six months of 2013 increased 26% compared to Net income of $693 in the first six months of 2012. Net income per ordinary share of $1.83 in the first six months of 2013 decreased 10% from Net income per ordinary share of $2.04 in the first six months of 2012. The increase in Net income attributable to Eaton ordinary shareholders in both the second quarter and the first six months of 2013 was primarily due to higher sales volumes resulting from the acquisition of businesses, the most substantial of which was Cooper, and a lower effective tax rate. The decrease in Net income per ordinary share in both the second quarter and the first six months of 2013 reflects the impact of the incremental shares issued in the acquisition of Cooper and purchase price accounting charges resulting from the transaction.
Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquired businesses and acquisition integration charges, see Note 2 and Note 3 to the Condensed Consolidated Financial Statements, respectively.
Electrical Products
 
Three months ended
June 30
 
Increase
 
Six months ended
June 30
 
Increase
 
2013
 
2012
 
 
2013
 
2012
 
Net sales
$
1,758

 
$
903

 
95
%
 
$
3,418

 
$
1,789

 
91
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
272

 
151

 
80
%
 
513

 
290

 
77
%
Operating margin
15.5
%
 
16.7
%
 
 
 
15.0
%
 
16.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
12

 
$

 
 
 
$
15

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
284

 
$
151

 
88
%
 
$
528

 
$
290

 
82
%
Operating margin
16.2
%
 
16.7
%
 
 
 
15.4
%
 
16.2
%
 
 
Net sales increased 95% in the second quarter of 2013 compared to the second quarter of 2012 due to the acquisition of businesses. Net sales increased 91% in the first six months of 2013 compared to the first six months of 2012 due to an increase of 94% from the acquisition of businesses, partially offset by a decrease in core sales of 3%. Core sales in the second quarter of 2013 and the first six months of 2013 reflect continued strength in the U.S., Middle East and Latin America offset by weakness in Asia Pacific and Europe. Eaton now anticipates its Electrical Products markets will grow 1.5% for all of 2013.
Operating margin before acquisition integration charges decreased 0.5 percentage points from 16.7% in the second quarter of 2012 to 16.2% in the second quarter of 2013. Operating margin before acquisition integration charges decreased 0.8 percentage points from 16.2% in the first six months of 2012 to 15.4% in the first six months of 2013. The decrease in operating margin in both the second quarter and the first six months of 2013 was primarily due to the changed mix of products in the segment as a result of the acquisitions and lower core sales, as noted above.

21


Electrical Systems and Services
 
Three months ended
June 30
 
Increase
 
Six months ended
June 30