10-Q 1 etn0630201810-qdoc.htm 10-Q Document

 
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, 2018
Commission file number 000-54863
EATON CORPORATION plc
(Exact name of registrant as specified in its charter)
Ireland
 
98-1059235
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
 
 
Eaton House, 30 Pembroke Road, Dublin 4, Ireland
 
D04 Y0C2
(Address of principal executive offices)
 
(Zip Code)
 
 
 
+353 1637 2900
 
 
 
 
 
 
(Registrant's telephone number, including area code)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Not applicable
 
 
 
 
 
 
(Former name, former address and former fiscal year if changed since last report)
 
 
 
 
 
 
 
 
 

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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
 
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. o
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 433.3 million Ordinary Shares outstanding as of June 30, 2018.
 







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)
2018
 
2017
 
2018
 
2017
Net sales
$
5,487

 
$
5,132

 
$
10,738

 
$
9,980

 
 
 
 
 
 
 
 
Cost of products sold
3,671

 
3,448

 
7,244

 
6,755

Selling and administrative expense
901

 
891

 
1,790

 
1,767

Research and development expense
145

 
150

 
301

 
293

Interest expense - net
68

 
60

 
138

 
121

Other expense - net
8

 
11

 
6

 
5

Income before income taxes
694

 
572

 
1,259

 
1,039

Income tax expense
83

 
55

 
161

 
88

Net income
611

 
517

 
1,098

 
951

Less net income for noncontrolling interests
(1
)
 
(1
)
 

 
(1
)
Net income attributable to Eaton ordinary shareholders
$
610

 
$
516

 
$
1,098

 
$
950

 
 
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
 
 
 
 
Diluted
$
1.39

 
$
1.15

 
$
2.50

 
$
2.11

Basic
1.40

 
1.16

 
2.51

 
2.12

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
 
 
 
 
Diluted
437.3

 
448.6

 
439.5

 
449.8

Basic
435.2

 
446.3

 
437.0

 
447.5

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.66

 
$
0.60

 
$
1.32

 
$
1.20


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)
2018
 
2017
 
2018
 
2017
Net income
$
611

 
$
517

 
$
1,098

 
$
951

Less net income for noncontrolling interests
(1
)
 
(1
)
 

 
(1
)
Net income attributable to Eaton ordinary shareholders
610

 
516

 
1,098

 
950

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Currency translation and related hedging instruments
(671
)
 
320

 
(414
)
 
548

Pensions and other postretirement benefits
56

 
4

 
82

 
37

Cash flow hedges
(9
)
 
(1
)
 
4

 
1

Other comprehensive (loss) income attributable to Eaton
   ordinary shareholders
(624
)
 
323

 
(328
)
 
586

 
 
 
 
 
 
 
 
Total comprehensive (loss) income attributable to Eaton
  ordinary shareholders
$
(14
)
 
$
839

 
$
770

 
$
1,536


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,
2018
 
December 31,
2017
Assets
 
 
 
Current assets
 
 
 
Cash
$
256

 
$
561

Short-term investments
236

 
534

Accounts receivable - net
4,092

 
3,943

Inventory
2,753

 
2,620

Prepaid expenses and other current assets
576

 
679

Total current assets
7,913

 
8,337

 
 
 
 
Property, plant and equipment
 
 
 
Land and buildings
2,458

 
2,491

Machinery and equipment
6,035

 
6,014

Gross property, plant and equipment
8,493

 
8,505

Accumulated depreciation
(5,031
)
 
(5,003
)
Net property, plant and equipment
3,462

 
3,502

 
 
 
 
Other noncurrent assets
 
 
 
Goodwill
13,427

 
13,568

Other intangible assets
5,050

 
5,265

Deferred income taxes
296

 
253

Other assets
1,717

 
1,698

Total assets
$
31,865

 
$
32,623

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
504

 
$
6

Current portion of long-term debt
428

 
578

Accounts payable
2,192

 
2,166

Accrued compensation
353

 
453

Other current liabilities
1,910

 
1,872

Total current liabilities
5,387

 
5,075

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
6,753

 
7,167

Pension liabilities
1,174

 
1,226

Other postretirement benefits liabilities
354

 
362

Deferred income taxes
486

 
538

Other noncurrent liabilities
986

 
965

Total noncurrent liabilities
9,753

 
10,258

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
16,690

 
17,253

Noncontrolling interests
35

 
37

Total equity
16,725

 
17,290

Total liabilities and equity
$
31,865

 
$
32,623

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)
2018
 
2017
Operating activities
 
 
 
Net income
$
1,098

 
$
951

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
457

 
453

Deferred income taxes
(109
)
 
(105
)
Pension and other postretirement benefits expense
82

 
104

Contributions to pension plans
(72
)
 
(160
)
Contributions to other postretirement benefits plans
(12
)
 
(11
)
Changes in working capital
(482
)
 
(381
)
Other - net
(124
)
 
186

Net cash provided by operating activities
838

 
1,037

 
 
 
 
Investing activities
 

 
 
Capital expenditures for property, plant and equipment
(280
)
 
(246
)
Sales (purchases) of short-term investments - net
284

 
(309
)
Other - net
(41
)
 
(31
)
Net cash used in investing activities
(37
)
 
(586
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
500

 
832

Payments on borrowings
(486
)
 
(543
)
Cash dividends paid
(578
)
 
(537
)
Exercise of employee stock options
21

 
49

Repurchase of shares
(600
)
 
(465
)
Employee taxes paid from shares withheld
(23
)
 
(21
)
Other - net
(2
)
 
(4
)
Net cash used in financing activities
(1,168
)
 
(689
)
 
 
 
 
Effect of currency on cash
62

 
7

Total decrease in cash
(305
)
 
(231
)
Cash at the beginning of the period
561

 
543

Cash at the end of the period
$
256

 
$
312


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 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 2017 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.
During the first quarter of 2018, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segment is eMobility (which includes certain legacy Electrical Products and Vehicle product lines). See Note 13 for additional information related to these segments.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and payment is due is not significant. Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the Consolidated Balance Sheet. See Note 3 for additional information.
Adoption of New Accounting Standards
Eaton adopted Accounting Standard Update 2014-09, Revenue from Contracts with Customers, at the start of the first quarter of 2018 using the modified retrospective approach and recorded a cumulative effect adjustment to retained earnings based on the current terms and conditions for open contracts as of January 1, 2018. The adoption of the standard did not have a material impact on the Company’s Consolidated financial statements. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

6


Consolidated Balance Sheet
Balance at December 31, 2017
 
Adjustments due to ASU 2014-09
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
Accounts receivable - net
$
3,943

 
$
(99
)
 
$
3,844

 
Prepaid expenses and other current assets
679

 
129

 
808

 
Deferred income taxes
253

 
1

 
254

 
 
 
 
 
 


Liabilities and shareholders' equity
 
 
 
 
 
 
Other current liabilities
$
1,872

 
$
33

 
$
1,905

 
Eaton shareholders' equity
17,253

 
(2
)
 
17,251

Eaton adopted Accounting Standards Update 2016-16, Intra-Entity Transfers of Assets Other Than Inventory (ASU 2016-16), at the start of the first quarter of 2018. This accounting standard requires companies to recognize the income tax effects of intercompany sales and transfers of assets other than inventory in the period in which the transfer occurs. The previous accounting standard required companies to defer the income tax effects of intercompany transfers of assets by recording a prepaid tax, until such assets were sold to an outside party or otherwise recognized. ASU 2016-16 requires companies to write off any income tax amounts that had been deferred as prepaid taxes from past intercompany transactions, and record deferred tax balances for amounts that have not been recognized, through a cumulative-effect adjustment to retained earnings. Upon adoption, the Company recorded a cumulative-effect adjustment of $199 to reduce retained earnings.
Eaton adopted Accounting Standards Update 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), at the start of the first quarter of 2018. The new standard requires companies to present service costs consistent with other employee compensation costs on the income statement and separate from all other elements of pension costs. The retrospective adoption of this standard resulted in an increase in selling and administrative expense with a corresponding decrease in Other expense - net of $1 for the six months ended June 30, 2018, and a reduction in selling and administrative expense with a corresponding increase in Other expense - net of $20 for the six months ended June 30, 2017.
Recently Issued Accounting Pronouncement
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842), (ASU 2016-02). This accounting standard requires that a lessee recognize a lease asset and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. ASU 2016-02 will require additional disclosures in the notes to the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2018. A project team has been formed to evaluate and implement the new standard. The project team is working to gather the data required to account for leases under the new standard, and validating the functionality of third-party lease accounting software. In addition, the Company is in the process of identifying and implementing the appropriate changes to business processes and controls to support recognition and disclosure under the new standard. Eaton plans to adopt the standard as of the first quarter of 2019. Eaton is evaluating the impact of ASU 2016-02 and an estimate of the impact to the consolidated financial statements cannot be made at this time.


7


Note 2.
ACQUISITION INTEGRATION CHARGES
Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:
 
Three months ended
June 30
 
Six months ended June 30
 
2018
 
2017
 
2018
 
2017
Electrical Products
$

 
$
1

 
$

 
$
2

Total acquisition integration charges before income taxes

 
1

 

 
2

Income taxes

 
1

 

 
1

Total after income taxes
$

 
$

 
$

 
$
1

Per ordinary share - diluted
$

 
$

 
$

 
$

Business segment acquisition integration charges in 2017 related to the integration of Ephesus Lighting, Inc. (Ephesus), which was acquired in 2015. The charges associated with Ephesus were included in Selling and administrative expense. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments.

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. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.
The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when title and risk and rewards of ownership have transferred to the customer. Sales recognized over time are less than 5% of Eaton’s Consolidated Net Sales. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the extent it is not probable that a significant reversal of cumulative sales will occur. Additionally, contracts can be modified to account for changes in contract specifications, requirements or sale price. The effect of a contract modification on the sales price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a cumulative catch-up basis.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and are recorded gross on the Condensed Consolidated Balance Sheet.
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they are typically earned at the completion of the contract when the customer is invoiced or when the customer pays Eaton.
Sales of products and services varies by segment and are discussed in Note 15 of Eaton’s 2017 Form 10-K and in Note 13.

8


In the Electrical Products segment, sales contracts are primarily for electrical components, industrial components, residential products, single phase power quality, emergency lighting, fire detection, wiring devices, structural support systems, circuit protection, and lighting products. These sales contracts are primarily based on a customer’s purchase order followed by our order acknowledgement, and may also include a master supply or distributor agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In the Electrical Systems and Services segment, sales contracts are primarily for 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. The majority of the sales contracts in this segment contain performance obligations satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility; however, certain power distribution and power quality services are recognized over time.
Many of the products and services in power distribution and power quality services meet the definition of continuous transfer of control to customers and are recognized over time. These products are engineered to a customer’s design specifications, have no alternative use to Eaton, and are controlled by the customer as evidenced by the customer’s contractual ownership of the work in process or our right to payment for work performed to date plus a reasonable margin. As control is transferring over time, sales are recognized based on the extent of progress towards completion of the obligation. Eaton generally uses an input method to determine the progress completed and sales are recorded proportionally as costs are incurred. Incurred cost represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.
In the Hydraulics segment, sales contracts are primarily for hydraulic components and systems for industrial and mobile equipment. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time when we ship the product from our facility.
In the Aerospace segment, sales contracts are primarily for aerospace fuel, hydraulics, and pneumatic systems for commercial and military use. These sales contracts are primarily based on a customer’s purchase order, and frequently covered by terms and conditions included in a long-term agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. Our military contracts are primarily fixed-price contracts that are not subject to performance-based payments or progress payments from the customer.
In the Vehicle segment, sales contracts are primarily for drivetrains, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks and commercial vehicles. These sales contracts are primarily based on a customer’s purchase order or a blanket purchase order subject to firm releases, frequently covered by terms and conditions included in a master supply agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In the eMobility segment, sales contracts are primarily for electronic and mechanical components and systems that improves the power management and performance of both on-road and off-road vehicles. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In limited circumstances, primarily in the Electrical and Vehicle segments, Eaton sells separately-priced warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Sales for these separately-priced warranties are recorded based on their stand-alone selling price and are recognized as revenue over the length of the warranty period.

9


The Company’s six operating segments and the following tables disaggregate sales by lines of businesses, geographic destination, market channel or end market.
 
Three months ended June 30, 2018
Net sales
United States
 
Rest of World
 
Total
Electrical Products
$
1,033

 
$
773

 
$
1,806

Electrical Systems and Services
983

 
530

 
1,513

Hydraulics
309

 
414

 
723

 
 
 
 
 
 
 
Original Equipment Manufacturers
 
Aftermarket, Distribution and End User
 
 
Aerospace
$
266

 
$
197

 
463

 
 
 
 
 
 
 
Commercial
 
 Passenger and Light Duty
 
 
Vehicle
$
452

 
$
447

 
899

 
 
 
 
 
 
eMobility
 
 
 
 
83

 
 
 
 
 
 
Total
 
 
 
 
$
5,487

 
Six months ended June 30, 2018
Net sales
United States
 
Rest of World
 
Total
Electrical Products
$
1,993

 
$
1,545

 
$
3,538

Electrical Systems and Services
1,877

 
1,017

 
2,894

Hydraulics
606

 
827

 
1,433

 
 
 
 
 
 
 
Original Equipment Manufacturers
 
Aftermarket, Distribution and End User
 

Aerospace
$
530

 
$
391

 
921

 
 
 
 
 

 
Commercial
 
 Passenger and Light Duty
 

Vehicle
$
882

 
$
910

 
1,792

 
 
 
 
 
 
eMobility
 
 
 
 
160

 

 

 

Total
 
 
 
 
$
10,738

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 receivables from customers were $3,606 and $3,399 at June 30, 2018 and December 31, 2017, 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 Condensed Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $150 and $117 at June 30, 2018 and January 1, 2018, respectively, and are recorded in Prepaid expenses and other current assets. The increase in the unbilled receivables was primarily due to revenue recognized and not yet billed, partially offset by billings to customers during the quarter.

10


Changes in the deferred revenue liabilities are as follows:
 
Deferred Revenue
Balance at January 1, 2018
$
227

Customer deposits and billings
463

Revenue recognized in the period
(443
)
Translation
(3
)
Balance at June 30, 2018
$
244

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, 2018 was approximately $5.4 billion. Eaton expects to recognize approximately 89% of this backlog in the next twelve months and the rest thereafter.
Impact of new accounting standard
In accordance with the new revenue accounting requirements, the impact of the adoption on the financial statement line items within the accompanying financial statements was as follows:
 
Three months ended June 30, 2018
Consolidated Statements of Income
As Reported
 
Adjustment
 
Balances without Adoption of ASC 606
Net sales
$
5,487

 
$
(11
)
 
$
5,476

Cost of products sold
3,671

 
(6
)
 
3,665

Income before income taxes
694

 
(5
)
 
689

Income tax expense
83

 
(1
)
 
82

Net income
611

 
(4
)
 
607

Net income attributable to Eaton ordinary shareholders
$
610

 
$
(4
)
 
$
606

 
Six months ended June 30, 2018
Consolidated Statements of Income
As Reported
 
Adjustment
 
Balances without Adoption of ASC 606
Net sales
$
10,738

 
$
(18
)
 
$
10,720

Cost of products sold
7,244

 
(10
)
 
7,234

Income before income taxes
1,259

 
(8
)
 
1,251

Income tax expense
161

 
(2
)
 
159

Net income
1,098

 
(6
)
 
1,092

Net income attributable to Eaton ordinary shareholders
$
1,098

 
$
(6
)
 
$
1,092


11


 
June 30, 2018
Condensed Consolidated Balance Sheets
As Reported
 
Adjustment
 
Balances without Adoption of ASC 606
Assets
 
 
 
 

Accounts receivable - net
$
4,092

 
$
121

 
$
4,213

Inventory
2,753

 
9

 
2,762

Prepaid expenses and other current assets
576

 
(164
)
 
412

Deferred income taxes
296

 
(1
)
 
295

 
 
 
 
 

Liabilities and shareholders’ equity
 
 
 
 

Other current liabilities
$
1,910

 
$
(31
)
 
$
1,879

Eaton shareholders' equity
$
16,725

 
$
(4
)
 
$
16,721


Note 4.
RESTRUCTURING CHARGES
During 2015, Eaton announced its commitment to undertake actions to reduce its cost structure in all business segments and at corporate. The multi-year initiative concluded at the end of 2017.
A summary of liabilities related to workforce reductions, plant closings and other associated costs announced as part of this program follows:
 
Workforce reductions
 
Plant closings and other
 
Total
Balance at December 31, 2016
$
113

 
$
1

 
$
114

  Liability recognized
57

 
59

 
116

  Payments
(102
)
 
(39
)
 
(141
)
  Other adjustments
(1
)
 
(16
)
 
(17
)
Balance at December 31, 2017
67

 
5

 
72

Payments
(25
)
 
(4
)
 
(29
)
Other adjustments
(10
)
 

 
(10
)
Balance at June 30, 2018
$
32

 
$
1

 
$
33



12


Note 5.
GOODWILL
Change in the carrying amount of goodwill by segment follows:
 
December 31,
2017
 
Translation
 
June 30,
2018
Electrical Products
$
6,678

 
$
(71
)
 
$
6,607

Electrical Systems and Services
4,311

 
(36
)
 
4,275

Hydraulics
1,257

 
(29
)
 
1,228

Aerospace
947

 
(3
)
 
944

Vehicle
294

 
(2
)
 
292

eMobility
81

 

 
81

Total
$
13,568

 
$
(141
)
 
$
13,427


Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segment is eMobility (which includes certain legacy Electrical Products and Vehicle product lines). The Company used the relative fair value method to reallocate goodwill to the associated reporting units.

Note 6.    RETIREMENT BENEFITS PLANS
The components of retirement benefits expense follow:
 
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
 
Three months ended June 30
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Service cost
$
25

 
$
24

 
$
16

 
$
18

 
$

 
$

 
Interest cost
31

 
31

 
13

 
14

 
4

 
4

 
Expected return on plan assets
(64
)
 
(61
)
 
(26
)
 
(23
)
 
(1
)
 
(1
)
 
Amortization
23

 
21

 
10

 
12

 
(3
)
 
(3
)
 
 
15

 
15

 
13

 
21

 

 

 
Settlements
11

 
17

 

 

 

 

 
Total expense
$
26

 
$
32

 
$
13

 
$
21

 
$

 
$

 
 
 
 
 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
 
Six months ended June 30
 
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
 
Service cost
$
50

 
$
48

 
$
32

 
$
35

 
$
1

 
$
1

 
Interest cost
61

 
62

 
27

 
27

 
7

 
7

 
Expected return on plan assets
(127
)
 
(122
)
 
(53
)
 
(46
)
 
(2
)
 
(2
)
 
Amortization
47

 
41

 
20

 
25

 
(6
)
 
(6
)
 
 
31

 
29

 
26

 
41

 

 

 
Settlements
25

 
34

 

 

 

 

 
Total expense
$
56

 
$
63

 
$
26

 
$
41

 
$

 
$


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



13


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, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
 
In December 2011, Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) filed an action against (a) Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively, “Cooper”), (b) M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc. (collectively, “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust (the “Trust”) in Texas state court. Pepsi alleged that it was harmed by a 2011 settlement agreement (“2011 Settlement”) among Cooper, Mafco, and Pneumo Abex, LLC (“Pneumo,” which prior to the 2011 Settlement was a Mafco subsidiary), which settlement resolved litigation that Pneumo had previously brought against Cooper involving, among other things, a guaranty related to Pneumo’s friction products business. In November 2015, after a Texas court ruled that Pepsi's claims should be heard in arbitration, Pepsi filed a demand for arbitration against Cooper, Mafco, the Trust, and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts have opined, among other things, that the value contributed to the Trust for a release of the guaranty was below reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities may result in plaintiffs suing Pepsi under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts have opined that Pepsi has no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations under the guaranty. The arbitration proceedings closed in December 2017. On July 11, 2018, the arbitration panel made certain findings and concluded that the value contributed to the Trust did not constitute reasonably equivalent value, but ordered the parties to recalculate the amount that should have been contributed to the Trust as of the date of the 2011 transaction. Based on the findings made by the panel and the recalculation ordered by the panel, Cooper believes that no additional amount should be contributed. Pepsi argued that an additional $347 should be contributed. Cooper and its expert disagree with Pepsi’s argument and believe that Pepsi’s recalculation is flawed and fails to comply with the instructions of the panel. Based on its calculation, the Company continues to believe that the ultimate resolution of this matter will not have a material impact on the Company’s consolidated financial statements.

Note 8.
INCOME TAXES

The effective income tax rate for the second quarter and the first six month of 2018 was expense of 12.0% and 12.8% compared to expense of 9.7% and 8.5% for the second quarter and first six months of 2017. The increase in the effective tax rate in the second quarter and first six months of 2018 was due to greater levels of income in higher tax jurisdictions and the impact of the U.S. Tax Cuts and Jobs Act (“TCJA"). During the second quarter of 2018, the Company increased tax contingencies for the current and prior years which was offset by a corresponding decrease of a related valuation allowance. The net impact of these adjustments did not have a material impact on tax expense or the balance sheet.

The TCJA was enacted on December 22, 2017 and the Company recorded provisional tax amounts in the fourth quarter of 2017 for the remeasurement of deferred tax balances, including valuation allowances related to the realization of deferred tax assets, and the one-time transition tax. The Company continues to analyze aspects of the TCJA, including potential impact to the provisional amounts recorded for the remeasurement of deferred tax balances and related valuation allowances, and the one-time transition tax. The Company did not record any adjustments to the 2017 provisional tax amounts in the second quarter of 2018.


14


Note 9. EQUITY
During the three and six months ended June 30, 2018, 4.0 million and 7.7 million ordinary shares, respectively, were repurchased under the 2016 Program in the open market at a total cost of $300 and $600, respectively. During the three and six months ended June 30, 2017, 2.7 million and 6.3 million ordinary shares, respectively, were repurchased under the 2016 Program in the open market at a total cost of $210 and $465, respectively.
The changes in Shareholders’ equity follow:
 
Eaton
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2017
$
17,253

 
$
37

 
$
17,290

Cumulative-effect adjustment upon adoption of ASU 2014-09
(2
)
 

 
(2
)
Cumulative-effect adjustment upon adoption of ASU 2016-16
(199
)
 

 
(199
)
Net income
1,098

 

 
1,098

Other comprehensive loss
(328
)
 

 
(328
)
Cash dividends paid
(578
)
 
(1
)
 
(579
)
Issuance of shares under equity-based compensation plans - net
46

 

 
46

Repurchase of shares
(600
)
 

 
(600
)
Changes in noncontrolling interest - net

 
(1
)
 
(1
)
Balance at June 30, 2018
$
16,690

 
$
35

 
$
16,725

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, 2017
$
(2,255
)
 
$
(1,139
)
 
$
(10
)
 
$
(3,404
)
Other comprehensive (loss) income
   before reclassifications
(414
)
 
13

 
(2
)
 
(403
)
Amounts reclassified from Accumulated other
   comprehensive loss

 
69

 
6

 
75

Net current-period Other comprehensive
   (loss) income
(414
)
 
82

 
4

 
(328
)
Balance at June 30, 2018
$
(2,669
)
 
$
(1,057
)
 
$
(6
)
 
$
(3,732
)
The reclassifications out of Accumulated other comprehensive loss follow:
 
Six months ended June 30, 2018
 
Consolidated statements
of income classification
Amortization of defined benefit pensions and other postretirement benefits items
 
 
 
Actuarial loss and prior service cost
$
(86
)
1 
 
Tax benefit
17

 
 
Total, net of tax
(69
)
 
 
 
 
 
 
Gains and (losses) on cash flow hedges
 
 
 
Currency exchange contracts
(8
)
 
Cost of products sold
Tax benefit
2

 
 
Total, net of tax
(6
)
 
 
 
 
 
 
Total reclassifications for the period
$
(75
)
 
 
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 6 for additional information about pension and other postretirement benefits items.


15


Net Income Per Share Attributable to Eaton Ordinary Shareholders
A summary of the calculation of net income per share attributable to Eaton ordinary shareholders follows:
 
Three months ended
June 30
 
Six months ended June 30
(Shares in millions)
2018
 
2017
 
2018
 
2017
Net income attributable to Eaton ordinary shareholders
$
610

 
$
516

 
$
1,098

 
$
950

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
437.3

 
448.6

 
439.5

 
449.8

Less dilutive effect of equity-based compensation
2.1

 
2.3

 
2.5

 
2.3

Weighted-average number of ordinary shares outstanding - basic
435.2

 
446.3

 
437.0

 
447.5

 
 
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
 
 
 
 
Diluted
$
1.39

 
$
1.15

 
$
2.50

 
$
2.11

Basic
1.40

 
1.16

 
2.51

 
2.12

For the second quarter and first six months of 2018, 0.6 million and 0.3 million stock options, respectively, 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 2017, 0.2 million and 0.7 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.

Note 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
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
 
 
 
 
 
 
 
Cash
$
256

 
$
256

 
$

 
$

Short-term investments
236

 
236

 

 

Net derivative contracts
(140
)
 

 
(140
)
 

 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Cash
$
561

 
$
561

 
$

 
$

Short-term investments
534

 
534

 

 

Net derivative contracts
36

 

 
36

 

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 measured using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $7,181 and fair value of $7,218 at June 30, 2018 compared to $7,745 and $8,048, respectively, at December 31, 2017. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities, and are considered a Level 2 fair value measurement.

16



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 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 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. 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. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.
Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments on an after-tax basis was $90 at June 30, 2018 and $88 at December 31, 2017, and designated on a pre-tax basis was $634 at June 30, 2018 and $652 at December 31, 2017.

17


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
noncurrent
assets
 
Other
current
liabilities
 
Other
noncurrent
liabilities
 
Type of
hedge
 
Term
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate
 swaps
$
2,550

 
$

 
$
18

 
$
1

 
$
51

 
Fair value
 
9 months to 16 years
Currency exchange contracts
950

 
13

 
5

 
18

 
4

 
Cash flow
 
1 to 36 months
Total
 
 
$
13

 
$
23

 
$
19

 
$
55

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
6,033

 
$
33

 
 
 
$
135

 
 
 
 
 
1 to 12 months
Commodity contracts
11

 

 
 
 

 
 
 
 
 
1 to 12 months
Total
 
 
$
33

 


 
$
135

 


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate
 swaps
$
2,965

 
$
1

 
$
41

 
$

 
$
17

 
Fair value
 
6 months to 17 years
Currency exchange contracts
924

 
7

 
7

 
22

 
2

 
Cash flow
 
1 to 36 months
Total
 
 
$
8

 
$
48

 
$
22

 
$
19

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
3,719

 
$
39

 
 
 
$
19

 
 
 
 
 
1 to 12 months
Commodity contracts
13

 
1

 
 
 

 
 
 
 
 
1 to 12 months
Total
 
 
$
40

 


 
$
19

 


 
 
 
 
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.

18


The impact of derivative instruments to the Consolidated Statement of Income and Comprehensive Income follow:
 
Gain (loss) recognized in
other comprehensive
(loss) income
 
Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss
 
Gain (loss) reclassified
from Accumulated other
comprehensive loss
 
Three months ended
June 30
 
 
 
Three months ended
June 30
 
2018
 
2017
 
 
 
2018
 
2017
Derivatives designated as
   cash flow hedges
 
 
 
 
 
 
 
 
 
Forward starting floating-to-fixed
 interest rate swaps
$

 
$
(5
)
 
Interest expense - net
 
$

 
$

Currency exchange contracts
(15
)
 
2

 
Cost of products sold
 
(4
)
 
(1
)
Total
$
(15
)
 
$
(3
)
 
 
 
$
(4
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in
other comprehensive
(loss) income
 
Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss
 
Gain (loss) reclassified
from Accumulated other
comprehensive loss
 
Six months ended
June 30
 
 
 
Six months ended
June 30
 
2018
 
2017
 
 
 
2018
 
2017
Derivatives designated as cash
flow hedges
 
 
 
 
 
 
 
 
 
Forward starting floating-to-fixed
interest rate swaps
$

 
$
(5
)
 
Interest expense - net
 
$

 
$

Currency exchange contracts
(2
)
 
1

 
Cost of products sold
 
(8
)
 
(5
)
Total
$
(2
)

$
(4
)



$
(8
)

$
(5
)

Amounts recognized in net income follow:
 
Three months ended
June 30
 
Six months ended
June 30
 
2018

2017
 
2018
 
2017
Derivatives designated as fair value hedges
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
(16
)
 
$
8

 
$
(59
)
 
$
(3
)
Related long-term debt converted to floating interest
   rates by interest rate swaps
16

 
(8
)
 
59

 
3

 
$

 
$

 
$

 
$

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

Note 12.
INVENTORY
Inventory is carried at lower of cost or net realizable value. The components of inventory follow:
 
June 30,
2018
 
December 31,
2017
Raw materials
$
1,065

 
$
953

Work-in-process
524

 
471

Finished goods
1,164

 
1,196

Total inventory
$
2,753

 
$
2,620



19


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 2018, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable business segment is eMobility (which includes certain legacy Electrical Products and Vehicle product lines). 
The eMobility segment designs, manufactures, markets, and supplies electrical and electronic components and systems that improve the power management and performance of both on-road and off-road vehicles. Products include high voltage inverters, converters, fuses, onboard chargers, circuit protection units, vehicle controls, power distribution, fuel tank isolation valves, and commercial vehicle hybrid systems. The principal markets for the eMobility segment are original equipment manufacturers and aftermarket customers of passenger cars, commercial vehicles, and construction, agriculture, and mining equipment.
Eaton’s operating segments are Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace, Vehicle, and eMobility. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton’s business segments, see Note 15 to the Consolidated Financial Statements contained in the 2017 Form 10-K.
 
Three months ended
June 30
 
Six months ended June 30
 
2018
 
2017
 
2018
 
2017
Net sales
 
 
 
 
 
 
 
Electrical Products
$
1,806

 
$
1,731

 
$
3,538

 
$
3,382

Electrical Systems and Services
1,513

 
1,414

 
2,894

 
2,747

Hydraulics
723

 
633

 
1,433

 
1,220

Aerospace
463

 
437

 
921

 
865

Vehicle
899

 
845

 
1,792

 
1,631

eMobility
83

 
72

 
160

 
135

Total net sales
$
5,487

 
$
5,132

 
$
10,738

 
$
9,980

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Electrical Products
$
334

 
$
299

 
$
641

 
$
585

Electrical Systems and Services
227

 
194

 
394

 
349

Hydraulics
101

 
74

 
191

 
134

Aerospace
90

 
81

 
179

 
160

Vehicle
166

 
141

 
298

 
249

eMobility
14

 
13

 
25

 
24

Total segment operating profit
932

 
802

 
1,728

 
1,501

 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
Amortization of intangible assets
(96
)
 
(96
)
 
(194
)
 
(190
)
Interest expense - net
(68
)
 
(60
)
 
(138
)
 
(121
)
Pension and other postretirement benefits expense
1

 
(11
)
 
(1
)
 
(22
)
Other corporate expense - net
(75
)
 
(63
)
 
(136
)
 
(129
)
Income before income taxes
694

 
572

 
1,259

 
1,039

Income tax expense
83

 
55

 
161

 
88

Net income
611

 
517

 
1,098

 
951

Less net income for noncontrolling interests
(1
)
 
(1
)
 

 
(1
)
Net income attributable to Eaton ordinary shareholders
$
610

 
$
516

 
$
1,098

 
$
950



20


Note 14.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Registered Senior Notes issued by Eaton Corporation are registered under the Securities Act of 1933. Eaton and certain of Eaton's 100% owned direct and indirect subsidiaries (the Guarantors) fully and unconditionally guaranteed (subject, in the case of the Guarantors, other than Eaton, to customary release provisions as described below), on a joint and several basis, the Registered Senior Notes. The following condensed consolidating financial statements are included so that separate financial statements of Eaton, Eaton Corporation and each of the Guarantors are not required to be filed with the Securities and Exchange Commission. The consolidating adjustments primarily relate to eliminations of investments in subsidiaries and intercompany balances and transactions. The condensed consolidating financial statements present investments in subsidiaries using the equity method of accounting. See Note 6 of Eaton's 2017 Form 10-K for additional information related to the Registered Senior Notes.
The guarantee of a Guarantor that is not a parent of the issuer will be automatically and unconditionally released and discharged in the event of any sale of the Guarantor or of all or substantially all of its assets, or in connection with the release or termination of the Guarantor as a guarantor under all other U.S. debt securities or U.S. syndicated credit facilities, subject to limitations set forth in the indenture. The guarantee of a Guarantor that is a direct or indirect parent of the issuer will only be automatically and unconditionally released and discharged in connection with the release or termination of such Guarantor as a guarantor under all other debt securities or syndicated credit facilities (in both cases, U.S. or otherwise), subject to limitations set forth in the indenture.
During 2018 and 2017, the Company undertook certain steps to restructure ownership of various subsidiaries. The transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. These restructurings have been reflected as of the beginning of the earliest period presented below.


21


 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2018
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,809

 
$
1,790

 
$
3,242

 
$
(1,354
)
 
$
5,487

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,427

 
1,289

 
2,312

 
(1,357
)
 
3,671

Selling and administrative expense
3

 
397

 
200

 
301

 

 
901

Research and development expense

 
37

 
35

 
73

 

 
145

Interest expense (income) - net

 
67

 
4

 
(6
)
 
3

 
68

Other expense (income) - net
(37
)
 
9

 
36

 

 

 
8

Equity in loss (earnings) of
   subsidiaries, net of tax
(587
)
 
(209
)
 
(921
)
 
(658
)
 
2,375

 

Intercompany expense (income) - net
11

 
24

 
557

 
(592
)
 

 

Income (loss) before income taxes
610

 
57


590


1,812


(2,375
)

694

Income tax expense (benefit)

 
(7
)
 
(14
)
 
104

 

 
83

Net income (loss)
610

 
64


604


1,708


(2,375
)

611

Less net loss (income) for
   noncontrolling interests

 

 

 
(1
)
 

 
(1
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
610

 
$
64


$
604


$
1,707


$
(2,375
)

$
610

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(624
)
 
$
(63
)
 
$
(608
)
 
$
(1,390
)
 
$
2,061

 
$
(624
)
Total comprehensive income
  (loss) attributable to Eaton
  ordinary shareholders
$
(14
)
 
$
1

 
$
(4
)
 
$
317

 
$
(314
)
 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2017
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,696

 
$
1,727

 
$
3,109

 
$
(1,400
)
 
$
5,132

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,371

 
1,263

 
2,210

 
(1,396
)
 
3,448

Selling and administrative expense
4

 
361

 
200

 
326

 

 
891

Research and development expense

 
47

 
46