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, 2019

Commission file number 000-54863

EATON CORPORATION plc

(Exact name of registrant as specified in its charter)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer," “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Act. ☐

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

There were 420.0 million Ordinary Shares outstanding as of June 30, 2019.

TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	33
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39
ITEM 4. CONTROLS AND PROCEDURES	39
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	41
ITEM 1A. RISK FACTORS	41
ITEM 2. UNRESTRICTED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41
ITEM 6. EXHIBITS	42
SIGNATURES	43

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)	2019			2018			2019			2018
Net sales	$	5,533		$	5,487		$	10,838		$	10,738
Cost of products sold	3,697			3,671			7,270			7,244
Selling and administrative expense	907			901			1,824			1,790
Research and development expense	151			145			307			301
Interest expense - net	63			68			129			138
Other (income) expense - net	(23		)	8			(33		)	6
Income before income taxes	738			694			1,341			1,259
Income tax expense	102			83			183			161
Net income	636			611			1,158			1,098
Less net income for noncontrolling interests	—			(1		)	—			—
Net income attributable to Eaton ordinary shareholders	$	636		$	610		$	1,158		$	1,098
Net income per share attributable to Eaton ordinary shareholders
Diluted	$	1.50		$	1.39		$	2.73		$	2.50
Basic	1.51			1.40			2.74			2.51
Weighted-average number of ordinary shares outstanding
Diluted	423.1			437.3			424.5			439.5
Basic	421.6			435.2			422.8			437.0
Cash dividends declared per ordinary share	$	0.71		$	0.66		$	1.42		$	1.32

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)	2019			2018			2019			2018
Net income	$	636		$	611		$	1,158		$	1,098
Less net income for noncontrolling interests	—			(1		)	—			—
Net income attributable to Eaton ordinary shareholders	636			610			1,158			1,098
Other comprehensive (loss) income, net of tax
Currency translation and related hedging instruments	(36		)	(671		)	17			(414		)
Pensions and other postretirement benefits	32			56			53			82
Cash flow hedges	(26		)	(9		)	(33		)	4
Other comprehensive (loss) income attributable to Eaton    ordinary shareholders	(30		)	(624		)	37			(328		)
Total comprehensive income (loss) attributable to Eaton   ordinary shareholders	$	606		$	(14	)	$	1,195		$	770

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

3

EATON CORPORATION plc

CONSOLIDATED BALANCE SHEETS

(In millions)	June 30, 2019			December 31, 2018
Assets
Current assets
Cash	$	412		$	283
Short-term investments	385			157
Accounts receivable - net	3,944			3,858
Inventory	2,853			2,785
Prepaid expenses and other current assets	532			507
Total current assets	8,126			7,590
Property, plant and equipment
Land and buildings	2,464			2,466
Machinery and equipment	6,261			6,106
Gross property, plant and equipment	8,725			8,572
Accumulated depreciation	(5,215		)	(5,105		)
Net property, plant and equipment	3,510			3,467
Other noncurrent assets
Goodwill	13,463			13,328
Other intangible assets	4,766			4,846
Operating lease assets	419			—
Deferred income taxes	303			293
Other assets	1,657			1,568
Total assets	$	32,244		$	31,092
Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	2		$	414
Current portion of long-term debt	5			339
Accounts payable	2,268			2,130
Accrued compensation	357			457
Other current liabilities	1,818			1,814
Total current liabilities	4,450			5,154
Noncurrent liabilities
Long-term debt	8,079			6,768
Pension liabilities	1,266			1,304
Other postretirement benefits liabilities	324			321
Operating lease liabilities	311			—
Deferred income taxes	389			349
Other noncurrent liabilities	1,064			1,054
Total noncurrent liabilities	11,433			9,796
Shareholders’ equity
Ordinary shares (420.0 million outstanding in 2019 and 423.6 million in 2018)	4			4
Capital in excess of par value	12,112			12,090
Retained earnings	8,300			8,161
Accumulated other comprehensive loss	(4,108		)	(4,145		)
Shares held in trust	(2		)	(3		)
Total Eaton shareholders’ equity	16,306			16,107
Noncontrolling interests	55			35
Total equity	16,361			16,142
Total liabilities and equity	$	32,244		$	31,092

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)	2019			2018
Operating activities
Net income	$	1,158		$	1,098
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	442			457
Deferred income taxes	7			(109		)
Pension and other postretirement benefits expense	75			82
Contributions to pension plans	(62		)	(72		)
Contributions to other postretirement benefits plans	(6		)	(12		)
Changes in working capital	(333		)	(482		)
Other - net	150			(124		)
Net cash provided by operating activities	1,431			838
Investing activities
Capital expenditures for property, plant and equipment	(298		)	(280		)
Cash paid for acquisition of a business, net of cash acquired	(243		)	—
Sales (purchases) of short-term investments - net	(221		)	284
Proceeds for settlement of currency exchange contracts not designated as hedges - net	50			—
Other - net	2			(41		)
Net cash used in investing activities	(710		)	(37		)
Financing activities
Proceeds from borrowings	1,232			500
Payments on borrowings	(757		)	(486		)
Cash dividends paid	(609		)	(578		)
Exercise of employee stock options	25			21
Repurchase of shares	(440		)	(600		)
Employee taxes paid from shares withheld	(44		)	(23		)
Other - net	(6		)	(2		)
Net cash used in financing activities	(599		)	(1,168		)
Effect of currency on cash	7			62
Total increase (decrease) in cash	129			(305		)
Cash at the beginning of the period	283			561
Cash at the end of the period	$	412		$	256

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 2018 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.

Leases

The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, Eaton uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.

Adoption of New Accounting Standards

Eaton adopted Accounting Standard Update 2016-02, Leases (Topic 842), and related amendments, in the first quarter of 2019 using the optional transition method and has not restated prior periods. The Company elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification of existing leases. The Company recorded a cumulative-effect adjustment of less than $1 to retained earnings as of January 1, 2019. Additionally, the adoption of the new standard resulted in the recording of lease assets and lease liabilities for operating leases of $435 and $446, respectively, as of January 1, 2019. The adoption of the standard did not have a material impact to the Consolidated Statements of Income or Cash Flows.

Eaton adopted Accounting Standard Update 2017-12, Derivatives and Hedging (Topic 815) - Targeted Improvements to Accounting for Hedging Activities, in the first quarter 2019 using the modified retrospective approach for hedge instruments that existed at the date of adoption. ASU 2017-12 is intended to better align the Company's risk management activities with financial reporting for hedging relationships. The standard eliminates the requirement to separately measure and report hedge ineffectiveness, expands the ability to hedge specific risk components, and generally requires the change in value of the hedge instrument and hedged item to be presented in the same income statement line. The new disclosure requirements were applied on a prospective basis and comparative information has not been restated. The adoption of the standard did not have a material impact on the consolidated financial statements.

6

Note 2. ACQUISITION AND DIVESTITURES OF BUSINESSES

Acquired controlling interest of Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S.

On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, with a primary focus on medium-voltage solutions for industrial and utility customers. Its sales for the 12 months ended September 30, 2018 were $126. The purchase price for the shares is approximately $214 on a cash and debt free basis. As required by the Turkish capital markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 through July 2019 to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Systems and Services business segment.

Acquisition of Innovative Switchgear Solutions, Inc.

On July 19, 2019, Eaton acquired Innovative Switchgear Solutions, Inc. (ISG), a specialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. Its 2018 sales were approximately $18. ISG will be reported within the Electrical Systems and Services business segment.

Commitment to acquire Souriau-Sunbank Connection Technologies

On July 22, 2019, Eaton committed to acquire the Souriau-Sunbank Connection Technologies (Souriau-Sunbank) business of TransDigm Group Inc. for $920. Headquartered in Versailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for harsh environments in the aerospace, defense, industrial, energy, and transport markets. Its sales for the 12 months ended June 30, 2019 were $363. Completion of the acquisition is subject to the required consultation processes with works councils, customary closing conditions, regulatory approvals, and Transdigm’s completion of other required steps. The transaction is expected to close by the end of 2019.

Spin-off of Lighting business

On March 1, 2019, Eaton announced it plans to pursue a tax-free spin-off of its Lighting business. The spin-off will create an independent, publicly traded company and is expected to be completed by the end of 2019.

Plan to divest Automotive Fluid Conveyance business

On March 1, 2019, Eaton announced it plans to sell its Automotive Fluid Conveyance business.

Note 3. ACQUISITION INTEGRATION AND DIVESTITURE CHARGES

Eaton incurs integration charges related to acquired businesses, and transaction and other charges to divest businesses. A summary of these charges follows:

	Three months ended June 30				Six months ended June 30
	2019		2018		2019		2018
Electrical Products	$	1	$	—	$	2	$	—
Electrical Systems and Services	1		—		1		—
Corporate	12		—		23		—
Total acquisition integration and divestiture charges before income tax	14		—		26		—
Income taxes	—		—		1		—
Total after income taxes	$	14	$	—	$	25	$	—
Per ordinary share - diluted	$	0.03	$	—	$	0.06	$	—

Business segment charges in 2019 are related to the planned spin-off of the Lighting business and the acquisition of Ulusoy Elektrik, and were included in Selling and administrative expense. In Business Segment Information, the charges reduced Operating profit of the related business segment.

Corporate charges in 2019 are primarily related to the planned spin-off of the Lighting business and were included in Selling and administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.

See Note 15 for additional information about business segments.

7

Note 4. 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 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, 2019
Net sales	United States		Rest of World		Total
Electrical Products	$	1,115	$	734	$	1,849
Electrical Systems and Services	1,049		533		1,582
Hydraulics	306		392		698
	Original Equipment Manufacturers		Aftermarket, Distribution and End User
Aerospace	$	299	$	218	517
	Commercial		Passenger and Light Duty
Vehicle	$	425	$	378	803
eMobility					84
Total					$	5,533

	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

8

	Six months ended June 30, 2019
Net sales	United States		Rest of World		Total
Electrical Products	$	2,162	$	1,447	$	3,609
Electrical Systems and Services	2,025		1,021		3,046
Hydraulics	596		788		1,384
	Original Equipment Manufacturers		Aftermarket, Distribution and End User
Aerospace	$	586	$	433	1,019
	Commercial		Passenger and Light Duty
Vehicle	$	856	$	757	1,613
eMobility					167
Total					$	10,838

	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 $3,585 and $3,402 at June 30, 2019 and December 31, 2018, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $93 and $94 at June 30, 2019 and December 31, 2018, respectively, and are recorded in Prepaid expenses and other current assets.

9

Changes in the deferred revenue liabilities are as follows:

	Deferred Revenue
Balance at December 31, 2018	$	248
Customer deposits and billings	440
Revenue recognized in the period	(440		)
Translation	5
Balance at June 30, 2019	$	253

	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, 2019 and December 31, 2018 was approximately $5.5 billion and $5.3 billion, respectively. At both June 30, 2019 and December 31, 2018, Eaton expects to recognize approximately 87% of this backlog in the next twelve months and the rest thereafter.

Note 5. GOODWILL

Change in the carrying amount of goodwill by segment follows:

	December 31, 2018		Additions		Translation			June 30, 2019
Electrical Products	$	6,562	$	—	$	(12	)	$	6,550
Electrical Systems and Services	4,241		144		13			4,398
Hydraulics	1,212		—		(10		)	1,202
Aerospace	941		—		—			941
Vehicle	292		—		—			292
eMobility	80		—		—			80
Total	$	13,328	$	144	$	(9	)	$	13,463

The 2019 additions to goodwill relate to the anticipated synergies of acquiring Ulusoy Elektrik. The allocation of the purchase price from this acquisition is preliminary and will be completed during the measurement period.

10

Note 6. LEASES

Eaton leases certain manufacturing facilities, warehouses, distribution centers, office space, vehicles and equipment. Most real estate leases contain renewal options. The exercise of lease renewal options is at the Company's sole discretion. The Company's lease agreements typically do not contain any significant guarantees of asset values at the end of a lease or restrictive covenants. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.

The components of lease expense follows:

	Three months ended June 30, 2019			Six months ended June 30, 2019
Operating lease cost	$	36		$	78
Finance lease cost:
Amortization of lease assets	1			2
Interest on lease liabilities	1			1
Short-term lease cost	14			27
Variable lease cost	7			11
Sublease income	(1		)	(2		)
Total lease cost	$	58		$	117

The net amount recorded on sale leaseback transactions for the three and six months ended June 30, 2019 were losses of $2 and gains of $16, respectively.

Supplemental cash flow information related to leases follows:

	Six months ended June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash outflows - payments on operating leases	$	(76	)
Operating cash outflows - interest payments on finance leases	(1		)
Financing cash outflows - payments on finance lease obligations	(2		)
Lease assets obtained in exchange for new lease obligations:
Operating leases	$	42
Finance leases	12

11

Supplemental balance sheet information related to leases follows:

	June 30, 2019
Operating Leases
Operating lease assets	$	419
Other current liabilities	121
Operating lease liabilities	311
Total operating lease liabilities	$	432
Finance Leases
Land and buildings	$	18
Machinery and equipment	12
Accumulated depreciation	(13		)
Net property, plant and equipment	$	17
Current portion of long-term debt	$	5
Long-term debt	13
Total finance lease liabilities	$	18
Weighted-average remaining lease term
Operating leases	5.2 years
Finance leases	4.1 years
Weighted-average discount rate
Operating leases	3.6		%
Finance leases	6.1		%

Maturities of lease liabilities at June 30, 2019 follows:

	Operating Leases		Finance Leases
2019	$	74	$	3
2020	126		6
2021	94		5
2022	63		3
2023	43		3
Thereafter	87		1
Total lease payments	$	487	$	21
Less imputed interest	55		3
Total present value of lease liabilities	$	432	$	18

12

A summary of minimum rental commitments at December 31, 2018 under noncancelable operating leases, which expire at various dates and in most cases contain renewal options, for each of the next five years and thereafter in the aggregate, follow:

	Operating Leases
2019	$	165
2020	133
2021	106
2022	75
2023	53
Thereafter	110
Total lease commitments	$	642

Note 7. DEBT

On May 14, 2019, a subsidiary of Eaton issued euro denominated notes (2019 Euro Notes) with a face value of €1,100 ($1,232 based on the May 14, 2019 spot rate), in accordance with Regulation S promulgated under the Securities Act of 1933, as amended. The 2019 Euro Notes are comprised of two tranches of €600 and €500, which mature in 2021 and 2025, respectively, with interest payable annually at a respective rate of 0.02% and 0.70%. The issuer received proceeds totaling €1,097 ($1,229 based on the May 14, 2019 spot rate) from the issuance, net of financing costs and discounts. The 2019 Euro Notes are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries. The 2019 Euro Notes contain customary optional redemption and par call provisions. The 2019 Euro Notes also contain a change of control provision which requires the Company to make an offer to purchase all or any part of the 2019 Euro Notes at a purchase price of 101% of the principal amount plus accrued and unpaid interest. The capitalized deferred financing fees are amortized in Interest expense-net over the respective terms of the 2019 Euro Notes. The 2019 Euro Notes are subject to customary non-financial covenants.

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Note 8.    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
	2019			2018			2019			2018			2019			2018
Service cost	$	23		$	25		$	15		$	16		$	1		$	—
Interest cost	34			31			14			13			4			4
Expected return on plan assets	(59		)	(64		)	(27		)	(26		)	(1		)	(1		)
Amortization	16			23			9			10			(4		)	(3		)
	14			15			11			13			—			—
Settlements	13			11			1			—			—			—
Total expense	$	27		$	26		$	12		$	13		$	—		$	—
	United States pension benefit expense						Non-United States pension benefit expense						Other postretirement benefits expense
	Six months ended June 30
	2019			2018			2019			2018			2019			2018
Service cost	$	46		$	50		$	29		$	32		$	1		$	1
Interest cost	68			61			29			27			7			7
Expected return on plan assets	(117		)	(127		)	(54		)	(53		)	(1		)	(2		)
Amortization	31			47			19			20			(7		)	(6		)
	28			31