XML 28 R18.htm IDEA: XBRL DOCUMENT v3.22.1
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 31, 2022
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.
Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, 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 gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income.
•Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.
The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Condensed Consolidated Statements of Cash Flows.
For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business.
Eaton uses 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 had a carrying value on an after-tax basis of $2,819 million at March 31, 2022 and $2,880 million at December 31, 2021.
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets is as follows:
(In millions)Notional
amount		Other
 current
assets		Other
noncurrent
assets		Other
current
liabilities		Other
noncurrent
liabilities		Type of
hedge		Term
March 31, 2022      
Derivatives designated as hedges      
Forward starting floating-to-fixed
 interest rate swaps		$1,700 $— $45 $— $33 Cash flow
10 to 30 years
Currency exchange contracts1,248 21 — 12 5 Cash flow
1 to 36 months
Commodity contracts58 5 — — — Cash flow
1 to 12 months
Total $26 $45 $12 $38   
Derivatives not designated as hedges      
Currency exchange contracts$4,664 $42 $20  
1 to 12 months
Commodity contracts41 2 1  
1 month
Total $44 $21   
December 31, 2021      
Derivatives designated as hedges      
Fixed-to-floating interest rate
 swaps		$1,800 $22 $29 $— $— Fair value
8 months to 13 years
Forward starting floating-to-fixed
 interest rate swaps		1,350 — 38 — 79 Cash flow
11 to 31 years
Currency exchange contracts1,212 17 2 11 3 Cash flow
1 to 36 months
Commodity contracts50 2 — 1 — Cash flow
1 to 12 months
Total $41 $69 $12 $82   
Derivatives not designated as hedges      
Currency exchange contracts$5,285 $34 $9  
1 to 12 months
Commodity contracts62 1 1  
1 month
Total $35 $10   
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts. The cash flows resulting from the settlement of these derivatives have been classified in investing activities in the Condensed Consolidated Statement of Cash Flows.
As of March 31, 2022, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
CommodityMarch 31, 2022Term
Copper10 Millions of pounds
1 to 12 months
Gold1,418 Troy ounces
1 to 12 months
Silver560,367 Troy ounces
1 to 12 months
The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
(In millions)Carrying amount of the hedged
assets (liabilities)
Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged
asset (liabilities) (a)
Location on Consolidated Balance SheetsMarch 31, 2022December 31, 2021March 31, 2022December 31, 2021
Long-term debt$(2,413)$(2,413)$(70)$(84)
(a) At March 31, 2022 and December 31, 2021, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $70 million and $33 million, respectively.
The impact of hedging activities to the Consolidated Statements of Income is as follows:
Three months ended March 31, 2022
(In millions)Net salesCost of products soldInterest expense - net
Amounts from Consolidated Statements of Income$4,843 $3,269 $32 
Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item$2 $(3)$— 
Derivative designated as hedging instrument(2)3 — 
Commodity contracts
Hedged item$— $(1)$— 
Derivative designated as hedging instrument— 1 — 
Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item$— $— $8 
Derivative designated as hedging instrument— — (8)
Three months ended March 31, 2021
(In millions)Net salesCost of products soldInterest expense - net
Amounts from Consolidated Statements of Income$4,692 $3,184 $38 
Gain (loss) on derivatives designated as cash flow hedges
Currency exchange contracts
Hedged item$3 $1 $— 
Derivative designated as hedging instrument(3)(1)— 
Commodity contracts
Hedged item$— $(2)$— 
Derivative designated as hedging instrument— 2 — 
Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item$— $— $19 
Derivative designated as hedging instrument— — (19)
The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:
Gain (loss) recognized in Consolidated Statements of IncomeConsolidated Statements of Income classification
Three months ended
March 31
(In millions)20222021
Gain (loss) on derivatives not designated as hedges 
Currency exchange contracts$(8)$(63)Interest expense - net
Commodity Contracts1 2 Cost of products sold
Total$(7)$(61)
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements of Income and Comprehensive Income is as follows:
Gain (loss) recognized in
other comprehensive
(loss) income		Location of gain (loss)
reclassified from
Accumulated other
comprehensive loss 		Gain (loss) reclassified
from Accumulated other
comprehensive loss
Three months ended
March 31		Three months ended
March 31
(In millions)2022202120222021
Derivatives designated as cash
   flow hedges
Forward starting floating-to-fixed
interest rate swaps		$124 $129 Interest expense - net$— $— 
Currency exchange contracts— (13)Net sales and Cost of products sold— (4)
Commodity contracts5 3 Cost of products sold1 2 
Non-derivative designated as net
   investment hedges
Foreign currency denominated debt62 144 Interest expense - net— — 
Total$191 $263 $1 $(2)
At March 31, 2022, a gain of $14 million of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.