Document
Table of Contents

 
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, 2016
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
 
-
(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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 454.7 million Ordinary Shares outstanding as of June 30, 2016.
 



Table of Contents

TABLE OF CONTENTS
 
 
EX-12
 
EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
EX-101 INSTANCE DOCUMENT
 
EX-101 SCHEMA DOCUMENT
 
EX-101 CALCULATION LINKBASE DOCUMENT
 
EX-101 DEFINITION LINKBASE DOCUMENT
 
EX-101 LABELS LINKBASE DOCUMENT
 
EX-101 PRESENTATION LINKBASE DOCUMENT
 



Table of Contents

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)
2016
 
2015
 
2016
 
2015
Net sales
$
5,080

 
$
5,372

 
$
9,893

 
$
10,595

 
 
 
 
 
 
 
 
Cost of products sold
3,419

 
3,675

 
6,710

 
7,268

Selling and administrative expense
897

 
901

 
1,789

 
1,816

Research and development expense
149

 
158

 
298

 
316

Interest expense - net
57

 
59

 
114

 
116

Other expense (income) - net
5

 
(19
)
 
(13
)
 
(24
)
Income before income taxes
553

 
598

 
995

 
1,103

Income tax expense
61

 
63

 
100

 
101

Net income
492

 
535

 
895

 
1,002

Less net income for noncontrolling interests
(1
)
 

 

 
(1
)
Net income attributable to Eaton ordinary shareholders
$
491

 
$
535

 
$
895

 
$
1,001

 
 
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
 
 
 
 
Diluted
$
1.07

 
$
1.14

 
$
1.95

 
$
2.13

Basic
1.08

 
1.14

 
1.96

 
2.14

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding
 
 
 
 
 
 
 
Diluted
458.3

 
469.2

 
459.0

 
469.6

Basic
457.0

 
467.6

 
457.8

 
467.7

 
 
 
 
 
 
 
 
Cash dividends declared per ordinary share
$
0.57

 
$
0.55

 
$
1.14

 
$
1.10


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

2

Table of Contents

EATON CORPORATION plc
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
Three months ended
June 30
 
Six months ended
June 30
(In millions)
2016
 
2015
 
2016
 
2015
Net income
$
492

 
$
535

 
$
895

 
$
1,002

Less net income for noncontrolling interests
(1
)
 

 

 
(1
)
Net income attributable to Eaton ordinary shareholders
491

 
535

 
895

 
1,001

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Currency translation and related hedging instruments
(296
)
 
209

 
(35
)
 
(511
)
Pensions and other postretirement benefits
53

 
18

 
87

 
104

Cash flow hedges
(12
)
 
3

 
(34
)
 
3

Other comprehensive (loss) income attributable to Eaton
   ordinary shareholders
(255
)
 
230

 
18

 
(404
)
 


 


 


 


Total comprehensive income attributable to Eaton
  ordinary shareholders
$
236

 
$
765

 
$
913

 
$
597


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


3

Table of Contents

EATON CORPORATION plc
CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions)
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets
 
 
 
Cash
$
323

 
$
268

Short-term investments
146

 
177

Accounts receivable - net
3,628

 
3,479

Inventory
2,323

 
2,323

Prepaid expenses and other current assets
406

 
369

Total current assets
6,826

 
6,616

 
 
 
 
Property, plant and equipment - net
3,551

 
3,565

 
 
 
 
Other noncurrent assets
 
 
 
Goodwill
13,450

 
13,479

Other intangible assets
5,795

 
6,014

Deferred income taxes
413

 
362

Other assets
1,119

 
960

Total assets
$
31,154

 
$
30,996

 
 
 
 
Liabilities and shareholders’ equity
 
 
 
Current liabilities
 
 
 
Short-term debt
$
557

 
$
426

Current portion of long-term debt
252

 
242

Accounts payable
1,802

 
1,758

Accrued compensation
316

 
366

Other current liabilities
1,889

 
1,833

Total current liabilities
4,816

 
4,625

 
 
 
 
Noncurrent liabilities
 
 
 
Long-term debt
7,605

 
7,746

Pension liabilities
1,554

 
1,586

Other postretirement benefits liabilities
433

 
440

Deferred income taxes
365

 
390

Other noncurrent liabilities
1,017

 
978

Total noncurrent liabilities
10,974

 
11,140

 
 
 
 
Shareholders’ equity
 
 
 
Eaton shareholders’ equity
15,320

 
15,186

Noncontrolling interests
44

 
45

Total equity
15,364

 
15,231

Total liabilities and equity
$
31,154

 
$
30,996


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

4

Table of Contents

EATON CORPORATION plc
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 
Six months ended
June 30
(In millions)
2016
 
2015
Operating activities
 
 
 
Net income
$
895

 
$
1,002

Adjustments to reconcile to net cash provided by operating activities
 
 
 
Depreciation and amortization
467

 
460

Deferred income taxes
(74
)
 
(29
)
Pension and other postretirement benefits expense
116

 
158

Contributions to pension plans
(74
)
 
(258
)
Contributions to other postretirement benefits plans
(18
)
 
(16
)
Excess tax benefit from equity-based compensation
(3
)
 

Changes in working capital
(273
)
 
(506
)
Other - net
80

 
(155
)
Net cash provided by operating activities
1,116

 
656

 
 
 
 
Investing activities
 

 
 
Capital expenditures for property, plant and equipment
(246
)
 
(246
)
Cash received from (paid for) acquisitions of businesses, net of cash acquired
1

 
(38
)
Sales of short-term investments - net
38

 
109

Proceeds from sale of businesses

 
1

Other - net
3

 
(33
)
Net cash used in investing activities
(204
)
 
(207
)
 
 
 
 
Financing activities
 
 
 
Proceeds from borrowings
151

 
137

Payments on borrowings
(240
)
 
(404
)
Cash dividends paid
(521
)
 
(514
)
Exercise of employee stock options
37

 
46

Repurchase of shares
(295
)
 
(170
)
Excess tax benefit from equity-based compensation
3

 

Other - net

 
(7
)
Net cash used in financing activities
(865
)
 
(912
)
 
 
 
 
Effect of currency on cash
8

 
(15
)
Total increase (decrease) in cash
55

 
(478
)
Cash at the beginning of the period
268

 
781

Cash at the end of the period
$
323

 
$
303


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

5

Table of Contents

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 2015 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 2016, the Company adopted Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the related debt liability rather than an asset. The Company has applied this standard retrospectively. The adoption of ASU 2015-03 resulted in the reclassification of $33 and $35 within the Company's Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, respectively, from Other noncurrent assets to a reduction in Long-term debt.
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (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. 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.
In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This accounting standard supersedes all existing US GAAP revenue recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration which the company expects to collect in exchange for those goods or services. ASU 2014-09 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, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14). This accounting standard defers the effective date of ASU 2014-09 for one year and permits early adoption as of the original effective date. Eaton is evaluating the impact of ASU 2014-09 and an estimate of the impact to the consolidated financial statements cannot be made at this time.

Note 2.
ACQUISITIONS OF BUSINESSES
Acquisition of Ephesus Lighting, Inc.
On October 28, 2015, Eaton acquired Ephesus Lighting, Inc. (Ephesus). Ephesus is a leader in LED lighting for stadiums and other high lumen outdoor and industrial applications. Its sales for the 12 months ended September 30, 2015 were $23. Ephesus is reported within the Electrical Products business segment.
Acquisition of UK Safety Technology Manufacturer Oxalis Group Ltd.
On January 12, 2015, Eaton acquired Oxalis Group Ltd. (Oxalis). Oxalis is a manufacturer of closed-circuit television camera stations, public address and general alarm systems and other electrical products for the hazardous area, marine and industrial communications markets. Its sales for the 12 months ended December 31, 2014 were $9. Oxalis is reported within the Electrical Systems and Services business segment.


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Table of Contents

Note 3.
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
 
2016
 
2015
 
2016
 
2015
Electrical Products
$
1

 
$
6

 
$
1

 
$
12

Electrical Systems and Services

 
4

 
1

 
7

Hydraulics

 
1

 

 
2

Total business segments
1

 
11

 
2

 
21

Corporate

 
1

 

 
2

Total acquisition integration charges before income taxes
1

 
12

 
2

 
23

Income taxes

 
4

 
1

 
8

Total after income taxes
$
1

 
$
8

 
$
1

 
$
15

Per ordinary share - diluted
$

 
$
0.02

 
$

 
$
0.03

Business segment acquisition integration charges in 2016 related to the integration of Ephesus and Oxalis. The charges associated with Ephesus and Oxalis were included in Selling and administrative expense and Cost of products sold, respectively. Business segment acquisition integration charges in 2015 related primarily to the integration of Cooper Industries plc (Cooper), which was acquired in 2012. The integration of Cooper included costs related to restructuring activities Eaton undertook in an effort to gain efficiencies in selling, marketing, traditional back-office functions, manufacturing, and distribution. These charges were included in Cost of products sold or Selling and administrative expense, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments.
Corporate acquisition integration charges in 2015 also related to the integration of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.

Note 4.
RESTRUCTURING CHARGES
During 2015, Eaton announced its intention to undertake actions to reduce its cost structure in all business segments and at corporate. Restructuring charges for the three and six months ended June 30, 2016, were $35 and $98, respectively, and were $4 and $14 for the three and six months ended June 30, 2015, respectively. The charges associated with restructuring activities are anticipated to be $145 in 2016 and $130 in 2017.
A summary of restructuring charges by type follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2016
 
2015
 
2016
 
2015
Workforce reductions
$
20

 
$
3

 
$
77

 
$
12

Plant closings and other
15

 
1

 
21

 
2

Total
$
35

 
$
4

 
$
98

 
$
14

    

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Table of Contents

A summary of restructuring charges by segment follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2016
 
2015
 
2016
 
2015
Electrical Products
$
9

 
$
1

 
$
26

 
$
1

Electrical Systems & Services
3

 

 
13

 

Hydraulics
18

 
1

 
34

 
9

Aerospace

 

 
4

 

Vehicle
5

 
2

 
17

 
4

Corporate

 

 
4

 

Total
$
35

 
$
4

 
$
98

 
$
14

A summary of liabilities related to workforce reductions, plant closings and other associated costs follows:
 
Workforce reductions
 
Plant closings and other
 
Total
Balance at December 31, 2014
$

 
$

 
$

  Liability recognized
112

 
17

 
129

  Payments
(59
)
 
(3
)
 
(62
)
  Other adjustments
1

 
(14
)
 
(13
)
Balance at December 31, 2015
54

 

 
54

Liability recognized
77

 
21

 
98

Payments
(55
)
 
(9
)
 
(64
)
Other adjustments
(1
)
 
(11
)
 
(12
)
Balance at June 30, 2016
$
75

 
$
1

 
$
76

These charges were included in Cost of products sold, Selling and administrative expenses or Other income-net, as appropriate. In Business Segment Information, the charges reduced Operating profit of the related business segment. See Note 13 for additional information about business segments.

Note 5.
GOODWILL
A summary of goodwill follows:
 
 
Electrical
Products
 
Electrical
Systems and
Services
 
Hydraulics
 
Aerospace
 
Vehicle
 
Total
December 31, 2015
 
$
6,642

 
$
4,279

 
$
1,259

 
$
956

 
$
343

 
$
13,479

Additions
 
1

 

 

 

 

 
1

Translation
 
(21
)
 
(5
)
 
4

 
(10
)
 
2

 
(30
)
June 30, 2016
 
$
6,622

 
$
4,274

 
$
1,263

 
$
946

 
$
345

 
$
13,450



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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
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
$
27

 
$
30

 
$
17

 
$
19

 
$
1

 
$
1

Interest cost
32

 
39

 
16

 
18

 
5

 
6

Expected return on plan assets
(62
)
 
(65
)
 
(24
)
 
(25
)
 
(2
)
 
(1
)
Amortization
23

 
30

 
8

 
10

 
(2
)
 
1

 
20

 
34

 
17

 
22

 
2

 
7

Settlements and curtailments
18

 
19

 

 

 

 

Total expense
$
38

 
$
53

 
$
17

 
$
22

 
$
2

 
$
7

 
United States
pension benefit expense
 
Non-United States
pension benefit expense
 
Other postretirement
benefits expense
 
Six months ended June 30
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Service cost
$
55

 
$
61

 
$
33

 
$
37

 
$
2

 
$
3

Interest cost
63

 
78

 
32

 
36

 
9

 
12

Expected return on plan assets
(125
)
 
(131
)
 
(48
)
 
(50
)
 
(3
)
 
(2
)
Amortization
46

 
60

 
17

 
20

 
(4
)
 
1

 
39

 
68

 
34

 
43

 
4

 
14

Settlements and curtailments
39

 
33

 

 

 

 

Total expense
$
78

 
$
101

 
$
34

 
$
43

 
$
4

 
$
14


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. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
In December 2010, a Brazilian court held that a judgment obtained by a Brazilian company, Raysul, against another Brazilian company, Saturnia, which was sold by Eaton in 2006, could be enforced against Eaton Ltda. The judgment was based on an alleged violation of an agency agreement between Raysul and Saturnia. At March 31, 2016, the Company had a total accrual of 100 Brazilian Reais related to this matter ($31 based on current exchange rates). In June 2016, Eaton signed a settlement agreement and resolved the matter, which did not have a material impact on the consolidated financial statements.

Note 8.
INCOME TAXES
The effective income tax rate for the second quarter and first six months of 2016 was expense of 11%, and 10%, respectively, compared to an expense of 11% and 9% for the second quarter and first six months of 2015. The increase in the effective tax rate in the first six months of 2016 was primarily due to more income earned in higher tax jurisdictions.


9

Table of Contents

Note 9.
EQUITY
On October 22, 2013, Eaton's Board of Directors adopted a share repurchase program (2013 Program) that authorizes the repurchase of 40 million ordinary shares. During the first quarter of 2016 and 2015, 1.5 million and 2.4 million ordinary shares were repurchased under the 2013 Program in the open market at a total cost of $82 and $170, respectively. On February 24, 2016, the Board of Directors approved a new share repurchase program for share repurchases up to $2,500 of ordinary shares (2016 Program). Under the 2016 Program, the ordinary shares are expected to be repurchased over time, depending on market conditions, the market price of ordinary shares, capital levels, and other considerations. During the first and second quarter of 2016, 0.3 million and 3.7 million shares, respectively, were purchased on the open market under the 2016 Program for a total cost of $18 and $224, respectively.
The changes in Shareholders’ equity follow:
 
Eaton
shareholders’
equity
 
Noncontrolling
interests
 
Total
equity
Balance at December 31, 2015
$
15,186

 
$
45

 
$
15,231

Net income
895

 

 
895

Other comprehensive income
18

 

 
18

Cash dividends paid
(521
)
 

 
(521
)
Issuance of shares under equity-based compensation plans - net
66

 

 
66

Repurchase of shares
(324
)
 

 
(324
)
Change in capital

 
(1
)
 
(1
)
Balance at June 30, 2016
$
15,320

 
$
44

 
$
15,364

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, 2015
$
(2,492
)
 
$
(1,374
)
 
$
3

 
$
(3,863
)
Other comprehensive (loss) income
   before reclassifications
(35
)
 
22

 
(33
)
 
(46
)
Amounts reclassified from Accumulated other
   comprehensive loss (income)

 
65

 
(1
)
 
64

Net current-period Other comprehensive
   income (loss)
(35
)
 
87

 
(34
)
 
18

Balance at June 30, 2016
$
(2,527
)
 
$
(1,287
)
 
$
(31
)
 
$
(3,845
)
The reclassifications out of Accumulated other comprehensive loss follow:
 
Six months ended June 30, 2016
 
Consolidated statements
of income classification
Amortization of defined benefit pensions and other postretirement benefits items
 
 
 
Actuarial loss and prior service cost
$
(98
)
1 
 
Tax benefit
33

 
 
Total, net of tax
(65
)
 
 
 
 
 
 
Gains and (losses) on cash flow hedges
 
 
 
Currency exchange contracts
1

 
Cost of products sold
Tax expense

 
 
Total, net of tax
1

 
 
 
 
 
 
Total reclassifications for the period
$
(64
)
 
 
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.


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Table of Contents

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)
2016
 
2015
 
2016
 
2015
Net income attributable to Eaton ordinary shareholders
$
491

 
$
535

 
$
895

 
$
1,001

 
 
 
 
 
 
 
 
Weighted-average number of ordinary shares outstanding - diluted
458.3

 
469.2

 
459.0

 
469.6

Less dilutive effect of equity-based compensation
1.3

 
1.6

 
1.2

 
1.9

Weighted-average number of ordinary shares outstanding - basic
457.0

 
467.6

 
457.8

 
467.7

 
 
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary shareholders
 
 
 
 
 
 
 
Diluted
$
1.07

 
$
1.14

 
$
1.95

 
$
2.13

Basic
1.08

 
1.14

 
1.96

 
2.14

For the second quarter and first six months of 2016, 1.5 million and 1.9 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 2015, 1.3 million and 1.1 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 periods 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, 2016
 
 
 
 
 
 
 
Cash
$
323

 
$
323

 
$

 
$

Short-term investments
146

 
146

 

 

Net derivative contracts
152

 

 
152

 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(200
)
 

 
(200
)
 

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Cash
$
268

 
$
268

 
$

 
$

Short-term investments
177

 
177

 

 

Net derivative contracts
86

 

 
86

 

Long-term debt converted to floating interest rates by
   interest rate swaps - net
(94
)
 

 
(94
)
 

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.

11

Table of Contents

Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $7,857 and fair value of $8,506 at June 30, 2016 compared to $7,988 and $8,231, respectively, at December 31, 2015. 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.

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.
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 on an after-tax basis as non-derivative net investment hedging instruments was $97 at June 30, 2016 and $83 at December 31, 2015.

12

Table of Contents

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, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate
 swaps
$
3,765

 
$
1

 
$
199

 
$

 
$

 
Fair value
 
1 month to 18 years
Forward starting floating-to-fixed
 interest rate swaps
400

 

 

 

 
19

 
Cash flow
 
12 years
Currency exchange contracts
859

 
6

 
1

 
21

 
14

 
Cash flow
 
1 to 36 months
Total
 
 
$
7

 
$
200

 
$
21

 
$
33

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
3,469

 
$
35

 
$

 
$
38

 
$

 
 
 
1 to 24 months
Commodity contracts
50

 
2

 


 

 


 
 
 
1 to 12 months
Total
 
 
$
37

 
$

 
$
38

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed-to-floating interest rate
 swaps
$
3,715

 
$

 
$
96

 
$

 
$
2

 
Fair value
 
2 to 19 years
Forward starting floating-to-fixed
 interest rate swaps
50

 

 

 

 

 
Cash flow
 
12 years
Currency exchange contracts
724

 
18

 
1

 
8

 
6

 
Cash flow
 
1 to 36 months
Commodity contracts
1

 

 

 

 

 
Cash flow
 
1 to 12 months
Total
 
 
$
18

 
$
97

 
$
8

 
$
8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as
 hedges
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency exchange contracts
$
4,198

 
$
27

 


 
$
40

 


 
 
 
1 to 12 months
Total
 
 
$
27

 
 
 
$
40

 
 
 
 
 
 
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.

13

Table of Contents

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
 
2016
 
2015
 
 
 
2016
 
2015
Derivatives designated as
   cash flow hedges
 
 
 
 
 
 
 
 
 
Forward starting floating-to-fixed
 interest rate swaps
$
(10
)
 
$

 
Interest expense - net
 
$

 
$

Currency exchange contracts
(10
)
 
8

 
Cost of products sold
 
(2
)
 
4

Total
$
(20
)
 
$
8

 
 
 
$
(2
)
 
$
4

 
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
 
2016

2015
 
 
 
2016
 
2015
Derivatives designated as cash
   flow hedges
 
 
 
 
 
 
 
 
 
Forward starting floating-to-fixed
 interest rate swaps
$
(19
)
 
$

 
Interest expense - net
 
$

 
$

Currency exchange contracts
(32
)
 
10

 
Cost of products sold
 
1

 
6

Total
$
(51
)
 
$
10

 
 
 
$
1

 
$
6

Amounts recognized in net income follow:
 
Three months ended
June 30
 
Six months ended
June 30
 
2016

2015
 
2016
 
2015
Derivatives designated as fair value hedges
 
 
 
 
 
 
 
Fixed-to-floating interest rate swaps
$
30

 
$
(51
)
 
$
106

 
$
(3
)
Related long-term debt converted to floating interest
   rates by interest rate swaps
(30
)
 
51

 
(106
)
 
3

 
$

 
$

 
$

 
$

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

Note 12.
INVENTORY
The components of inventory follow:
 
June 30,
2016
 
December 31,
2015
Raw materials
$
917

 
$
885

Work-in-process
430

 
412

Finished goods
1,075

 
1,131

Inventory at FIFO
2,422

 
2,428

Excess of FIFO over LIFO cost
(99
)
 
(105
)
Total inventory
$
2,323

 
$
2,323



14

Table of Contents

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. Eaton’s operating segments are Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace and Vehicle. 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 2015 Form 10-K.
 
Three months ended
June 30
 
Six months ended
June 30
 
2016
 
2015
 
2016
 
2015
Net sales
 
 
 
 
 
 
 
Electrical Products
$
1,784

 
$
1,784

 
$
3,464

 
$
3,475

Electrical Systems and Services
1,429

 
1,502

 
2,771

 
2,950

Hydraulics
589

 
643

 
1,140

 
1,308

Aerospace
447

 
454

 
892

 
918

Vehicle
831

 
989

 
1,626

 
1,944

Total net sales
$
5,080

 
$
5,372

 
$
9,893

 
$
10,595

 
 
 
 
 
 
 
 
Segment operating profit
 
 
 
 
 
 
 
Electrical Products
$
322

 
$
276

 
$
593

 
$
536

Electrical Systems and Services
178

 
223

 
337

 
409

Hydraulics
59

 
74

 
100

 
140

Aerospace
83

 
77

 
163

 
154

Vehicle
137

 
190

 
255

 
354

Total segment operating profit
779

 
840

 
1,448

 
1,593

 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
Amortization of intangible assets
(98
)
 
(102
)
 
(198
)
 
(204
)
Interest expense - net
(57
)
 
(59
)
 
(114
)
 
(116
)
Pension and other postretirement benefits expense
(13
)
 
(33
)
 
(27
)
 
(61
)
Other corporate expense - net
(58
)
 
(48
)
 
(114
)
 
(109
)
Income before income taxes
553

 
598

 
995

 
1,103

Income tax expense
61

 
63

 
100

 
101

Net income
492

 
535

 
895

 
1,002

Less net income for noncontrolling interests
(1
)
 

 

 
(1
)
Net income attributable to Eaton ordinary shareholders
$
491

 
$
535

 
$
895

 
$
1,001



15


Note 14.
CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
On November 14, 2013, Eaton Corporation registered senior notes under the Securities Act of 1933 (the Senior Notes). Eaton and certain other 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 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.
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 2015 and 2016, 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. This restructuring has been reflected as of the beginning of the earliest period presented below.
 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2016
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,644

 
$
1,640

 
$
3,065

 
$
(1,269
)
 
$
5,080

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,263

 
1,197

 
2,230

 
(1,271
)
 
3,419

Selling and administrative expense
2

 
353

 
192

 
350

 

 
897

Research and development expense

 
55

 
46

 
48

 

 
149

Interest expense (income) - net

 
57

 
6

 
(7
)
 
1

 
57

Other expense (income) - net

 
12

 
4

 
(11
)
 

 
5

Equity in loss (earnings) of
   subsidiaries, net of tax
(594
)
 
(155
)
 
(820
)
 
(141
)
 
1,710

 

Intercompany expense (income) - net
101

 
(46
)
 
317

 
(372
)
 

 

Income (loss) before income taxes
491

 
105


698


968


(1,709
)

553

Income tax expense (benefit)

 
13

 
13

 
35

 

 
61

Net income (loss)
491

 
92


685


933


(1,709
)

492

Less net loss (income) for
   noncontrolling interests

 

 

 
(2
)
 
1

 
(1
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
491

 
$
92


$
685


$
931


$
(1,708
)

$
491

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(255
)
 
$
(7
)
 
$
(251
)
 
$
(334
)
 
$
592

 
$
(255
)
Total comprehensive income
  (loss) attributable to Eaton
  ordinary shareholders
$
236

 
$
85

 
$
434

 
$
597

 
$
(1,116
)
 
$
236


16


 
 
 
 
 
 
 
 
 
 
 
 
CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
1,806

 
$
1,705

 
$
3,248

 
$
(1,387
)
 
$
5,372

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
1,433

 
1,273

 
2,322

 
(1,353
)
 
3,675

Selling and administrative expense
2

 
368

 
172

 
359

 

 
901

Research and development expense

 
66

 
49

 
43

 

 
158

Interest expense (income) - net

 
58

 
5

 
(2
)
 
(2
)
 
59

Other expense (income) - net

 
11

 
(7
)
 
(23
)
 

 
(19
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(619
)
 
(58
)
 
(802
)
 
(127
)
 
1,606

 

Intercompany expense (income) - net
82

 
(267
)
 
481

 
(296
)
 

 

Income (loss) before income taxes
535

 
195


534


972


(1,638
)

598

Income tax expense (benefit)

 
41

 
(38
)
 
75

 
(15
)
 
63

Net income (loss)
535

 
154


572


897


(1,623
)

535

Less net loss (income) for
   noncontrolling interests

 

 

 
(1
)
 
1

 

Net income (loss) attributable to
   Eaton ordinary shareholders
$
535

 
$
154


$
572


$
896


$
(1,622
)

$
535

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
230

 
$
19

 
$
235

 
$
288

 
$
(542
)
 
$
230

Total comprehensive income
   (loss) attributable to Eaton
   ordinary shareholders
$
765

 
$
173

 
$
807

 
$
1,184

 
$
(2,164
)
 
$
765

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2016
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
3,182

 
$
3,210

 
$
5,943

 
$
(2,442
)
 
$
9,893

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
2,459

 
2,392

 
4,305

 
(2,446
)
 
6,710

Selling and administrative expense
4

 
718

 
386

 
681

 

 
1,789

Research and development expense

 
117

 
95

 
86

 

 
298

Interest expense (income) - net

 
110

 
9

 
(10
)
 
5

 
114

Other expense (income) - net

 
16

 
(3
)
 
(26
)
 

 
(13
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(1,098
)
 
(325
)
 
(1,489
)
 
(234
)
 
3,146

 

Intercompany expense (income) - net
199

 
(88
)
 
577

 
(688
)
 

 

Income (loss) before income taxes
895

 
175


1,243


1,829


(3,147
)

995

Income tax expense (benefit)

 
20

 
14

 
66

 

 
100

Net income (loss)
895

 
155


1,229


1,763


(3,147
)

895

Less net loss (income) for
   noncontrolling interests

 

 

 
(2
)
 
2

 

Net income (loss) attributable to
   Eaton ordinary shareholders
$
895

 
$
155


$
1,229


$
1,761


$
(3,145
)

$
895

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
18

 
$
33

 
$
25

 
$
(36
)
 
$
(22
)
 
$
18

Total comprehensive income
   (loss) attributable to Eaton
   ordinary shareholders
$
913

 
$
188

 
$
1,254

 
$
1,725

 
$
(3,167
)
 
$
913


17


CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2015
 
Eaton Corporation plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net sales
$

 
$
3,508

 
$
3,401

 
$
6,364

 
$
(2,678
)
 
$
10,595

 
 
 
 
 
 
 
 
 
 
 
 
Cost of products sold

 
2,743

 
2,568

 
4,599

 
(2,642
)
 
7,268

Selling and administrative expense
4

 
745

 
348

 
719

 

 
1,816

Research and development expense

 
137

 
94

 
85

 

 
316

Interest expense (income) - net

 
112

 
11

 
(7
)
 

 
116

Other expense (income) - net

 
6

 
(8
)
 
(22
)
 

 
(24
)
Equity in loss (earnings) of
   subsidiaries, net of tax
(1,164
)
 
(267
)
 
(1,515
)
 
(253
)
 
3,199

 

Intercompany expense (income) - net
159

 
(308
)
 
752

 
(603
)
 

 

Income (loss) before income taxes
1,001

 
340


1,151


1,846


(3,235
)

1,103

Income tax expense (benefit)

 
19

 
(17
)
 
116

 
(17
)
 
101

Net income (loss)
1,001

 
321


1,168


1,730


(3,218
)

1,002

Less net loss (income) for
   noncontrolling interests

 

 

 
(2
)
 
1

 
(1
)
Net income (loss) attributable to
   Eaton ordinary shareholders
$
1,001

 
$
321


$
1,168


$
1,728


$
(3,217
)

$
1,001

 
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
$
(404
)
 
$
63

 
$
(385
)
 
$
(465
)
 
$
787

 
$
(404
)
Total comprehensive income (loss) attributable to Eaton
ordinary shareholders
$
597

 
$
384

 
$
783

 
$
1,263

 
$
(2,430
)
 
$
597


18


CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2016
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$

 
$
4

 
$
5

 
$
314

 
$

 
$
323

Short-term investments

 

 
1

 
145

 

 
146

Accounts receivable - net

 
506

 
1,100

 
2,022

 

 
3,628

Intercompany accounts
   receivable
10

 
710

 
4,143

 
3,378

 
(8,241
)
 

Inventory

 
370

 
637

 
1,392

 
(76
)
 
2,323

Prepaid expenses and
   other current assets

 
112

 
45

 
224

 
25

 
406

Total current assets
10

 
1,702


5,931


7,475

 
(8,292
)
 
6,826

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net

 
885

 
720

 
1,946

 

 
3,551

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill

 
1,355

 
6,264

 
5,831

 

 
13,450

Other intangible assets

 
175

 
3,528

 
2,092

 

 
5,795

Deferred income taxes

 
999

 

 
236

 
(822
)
 
413

Investment in subsidiaries
32,022

 
13,353

 
71,629

 
11,997

 
(129,001
)
 

Intercompany loans receivable

 
7,751

 
1,509

 
54,824

 
(64,084
)
 

Other assets

 
620

 
127

 
372

 

 
1,119

Total assets
$
32,032

 
$
26,840

 
$
89,708

 
$
84,773

 
$
(202,199
)
 
$
31,154

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

 
$
532

 
$

 
$
25

 
$

 
$
557

Current portion of
   long-term debt

 
251

 

 
1

 

 
252

Accounts payable

 
427

 
322

 
1,053

 

 
1,802

Intercompany accounts payable
157

 
4,042

 
2,917

 
1,125

 
(8,241
)
 

Accrued compensation

 
63

 
39

 
214

 

 
316

Other current liabilities
30

 
584

 
336

 
940

 
(1
)
 
1,889

Total current liabilities
187

 
5,899

 
3,614

 
3,358

 
(8,242
)
 
4,816

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
6,915

 
667

 
17

 
6

 
7,605

Pension liabilities

 
618

 
167

 
769

 

 
1,554

Other postretirement
   benefits liabilities

 
239

 
116

 
78

 

 
433

Deferred income taxes

 

 
755

 
432

 
(822
)
 
365

Intercompany loans payable
16,525

 
1,924

 
44,729

 
906

 
(64,084
)
 

Other noncurrent liabilities

 
371

 
211

 
435

 

 
1,017

Total noncurrent liabilities
16,525

 
10,067


46,645


2,637


(64,900
)

10,974

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
15,320

 
10,874

 
39,449

 
78,740

 
(129,063
)
 
15,320

Noncontrolling interests

 

 

 
38

 
6

 
44

Total equity
15,320

 
10,874

 
39,449

 
78,778

 
(129,057
)
 
15,364

Total liabilities and equity
$
32,032

 
$
26,840


$
89,708


$
84,773


$
(202,199
)

$
31,154


19


CONDENSED CONSOLIDATING BALANCE SHEETS
DECEMBER 31, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
Cash
$

 
$
26

 
$
7

 
$
235

 
$

 
$
268

Short-term investments

 

 
2

 
175

 

 
177

Accounts receivable - net

 
512

 
1,030

 
1,937

 

 
3,479

Intercompany accounts
   receivable
1

 
842

 
3,888

 
2,928

 
(7,659
)
 

Inventory

 
357

 
651

 
1,395

 
(80
)
 
2,323

Prepaid expenses and
   other current assets

 
77

 
40

 
229

 
23

 
369

Total current assets
1

 
1,814

 
5,618

 
6,899

 
(7,716
)
 
6,616

 
 
 
 
 
 
 
 
 
 
 
 
Property, plant and
   equipment - net

 
930

 
750

 
1,885

 

 
3,565

 
 
 
 
 
 
 
 
 
 
 
 
Other noncurrent assets
 
 
 
 
 
 
 
 
 
 
 
Goodwill

 
1,355

 
6,264

 
5,860

 

 
13,479

Other intangible assets

 
182

 
3,624

 
2,208

 

 
6,014

Deferred income taxes

 
1,016

 

 
218

 
(872
)
 
362

Investment in subsidiaries
29,627

 
13,003

 
60,139

 
10,166

 
(112,935
)
 

Intercompany loans receivable

 
8,641

 
1,573

 
44,835

 
(55,049
)
 

Other assets

 
492

 
122

 
346

 

 
960

Total assets
$
29,628

 
$
27,433

 
$
78,090

 
$
72,417

 
$
(176,572
)
 
$
30,996

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

 
$
408

 
$

 
$
18

 
$

 
$
426

Current portion of
   long-term debt

 
1

 
240

 
1

 

 
242

Accounts payable

 
392

 
260

 
1,106

 

 
1,758

Intercompany accounts payable
219

 
4,009

 
2,248

 
1,183

 
(7,659
)
 

Accrued compensation

 
77

 
53

 
236

 

 
366

Other current liabilities
1

 
644

 
318

 
875

 
(5
)
 
1,833

Total current liabilities
220

 
5,531

 
3,119

 
3,419

 
(7,664
)
 
4,625

 
 
 
 
 
 
 
 
 
 
 
 
Noncurrent liabilities
 
 
 
 
 
 
 
 
 
 
 
Long-term debt

 
7,053

 
675

 
17

 
1

 
7,746

Pension liabilities

 
639

 
165

 
782

 

 
1,586

Other postretirement
   benefits liabilities

 
245

 
118

 
77

 

 
440

Deferred income taxes

 

 
815

 
447

 
(872
)
 
390

Intercompany loans payable
14,222

 
2,962

 
36,432

 
1,433

 
(55,049
)
 

Other noncurrent liabilities

 
346

 
200

 
432

 

 
978

Total noncurrent liabilities
14,222

 
11,245


38,405


3,188


(55,920
)

11,140

 
 
 
 
 
 
 
 
 
 
 
 
Shareholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Eaton shareholders' equity
15,186

 
10,657

 
36,566

 
65,773

 
(112,996
)
 
15,186

Noncontrolling interests

 

 

 
37

 
8

 
45

Total equity
15,186

 
10,657

 
36,566

 
65,810

 
(112,988
)
 
15,231

Total liabilities and equity
$
29,628

 
$
27,433


$
78,090


$
72,417


$
(176,572
)

$
30,996


20


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2016
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
(156
)
 
$
23

 
$
(298
)
 
$
1,547

 
$

 
$
1,116

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(40
)
 
(49
)
 
(157
)
 

 
(246
)
Cash received from (paid for) acquisitions of businesses, net of cash acquired

 

 
1

 

 

 
1

Sales (purchases) of short-term investments - net

 

 
2

 
36

 

 
38

Investments in affiliates
(1,250
)
 

 
(120
)
 
(1,370
)
 
2,740

 

Return of investments in affiliates

 

 
47

 

 
(47
)
 

Loans to affiliates

 
(284
)
 
(47
)
 
(4,236
)
 
4,567

 

Repayments of loans from affiliates

 
1,280

 

 
2,922

 
(4,202
)
 

Other - net

 
2

 
25

 
(24
)
 

 
3

Net cash provided by (used in) investing activities
(1,250
)
 
958


(141
)

(2,829
)

3,058


(204
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 
145

 

 
6

 

 
151

Payments on borrowings

 

 
(240
)
 

 

 
(240
)
Proceeds from borrowings from
   affiliates
2,203

 
1,385

 
782

 
197

 
(4,567
)
 

Payments on borrowings from
   affiliates
(18
)
 
(2,493
)
 
(1,658
)
 
(33
)
 
4,202

 

Capital contributions from affiliates

 

 
1,370

 
1,370

 
(2,740
)
 

Return of capital to affiliates

 

 

 
(47
)
 
47

 

Other intercompany financing
   activities

 
(43
)
 
183

 
(140
)
 

 

Cash dividends paid
(521
)
 

 

 

 

 
(521
)
Exercise of employee stock options
37

 

 

 

 

 
37

Repurchase of shares
(295
)
 

 

 

 

 
(295
)
Excess tax benefit from
   equity-based compensation

 
3

 

 

 

 
3

Net cash provided by (used in)
   financing activities
1,406

 
(1,003
)

437


1,353


(3,058
)

(865
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
8

 

 
8

Total increase (decrease) in cash

 
(22
)

(2
)

79




55

Cash at the beginning of the period

 
26

 
7

 
235

 

 
268

Cash at the end of the period
$

 
$
4


$
5


$
314


$


$
323


21


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015
 
Eaton
Corporation
plc
 
Eaton
Corporation
 
Guarantors
 
Other
subsidiaries
 
Consolidating
adjustments
 
Total
Net cash provided by (used in)
   operating activities
$
(84
)
 
$
(272
)
 
$
95

 
$
917

 
$

 
$
656

 
 
 
 
 
 
 
 
 
 
 
 
Investing activities
 
 
 
 
 
 
 
 
 
 
 
Capital expenditures for property,
   plant and equipment

 
(47
)
 
(63
)
 
(136
)
 

 
(246
)
Cash received from (paid for) acquisitions of businesses, net of cash acquired

 

 

 
(38
)
 

 
(38
)
Sales (purchases) of short-term
investments - net

 

 

 
109

 

 
109

Investments in affiliates
(1,482
)
 

 
(1,176
)
 
(1,482
)
 
4,140

 

Loans to affiliates

 
(307
)
 
(39
)
 
(6,027
)
 
6,373

 

Repayments of loans from affiliates

 
306

 
11

 
4,720

 
(5,037
)
 

Proceeds from sale of businesses

 

 

 
1

 

 
1

Other - net

 
(31
)
 
28

 
(30
)
 

 
(33
)
Net cash provided by (used in)
   investing activities
(1,482
)
 
(79
)

(1,239
)

(2,883
)

5,476


(207
)
 
 
 
 
 
 
 
 
 
 
 
 
Financing activities
 
 
 
 
 
 
 
 
 
 
 
Proceeds from borrowings

 
125

 

 
12

 

 
137

Payments on borrowings

 
(101
)
 
(301
)
 
(2
)
 

 
(404
)
Proceeds from borrowings from
   affiliates
2,242

 
3,775

 
314

 
42

 
(6,373
)
 

Payments on borrowings from
   affiliates
(39
)
 
(3,824
)
 
(1,160
)
 
(14
)
 
5,037

 

Capital contributions from affiliates

 
1,176

 
1,482

 
1,482

 
(4,140
)
 

Other intercompany financing activities

 
(959
)
 
804

 
155

 

 

Cash dividends paid
(514
)
 

 

 

 

 
(514
)
Exercise of employee stock options
46

 

 

 

 

 
46

Repurchase of shares
(170
)
 

 

 

 

 
(170
)
Other - net

 

 

 
(7
)
 

 
(7
)
Net cash provided by (used in)
   financing activities
1,565

 
192


1,139


1,668


(5,476
)

(912
)
 
 
 
 
 
 
 
 
 
 
 
 
Effect of currency on cash

 

 

 
(15
)
 

 
(15
)
Total increase (decrease) in cash
(1
)
 
(159
)

(5
)

(313
)



(478
)
Cash at the beginning of the period
1

 
173

 
13

 
594

 

 
781

Cash at the end of the period
$

 
$
14


$
8


$
281


$


$
303



22

Table of Contents

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

COMPANY OVERVIEW
Eaton Corporation plc (Eaton or the Company) is a power management company with 2015 net sales of $20.9 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic, and mechanical power more efficiently, safely, and sustainably. Eaton has approximately 96,000 employees in over 60 countries and sells products to customers in more than 175 countries.
Summary of Results of Operations
A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted follows:
 
Three months ended
June 30
 
Six months ended
June 30
 
2016
 
2015
 
2016
 
2015
Net sales
$
5,080

 
$
5,372

 
$
9,893

 
$
10,595

Net income attributable to Eaton ordinary shareholders
491

 
535

 
895

 
1,001

Net income per share attributable to Eaton ordinary shareholders - diluted
$
1.07

 
$
1.14

 
$
1.95

 
$
2.13

During 2015, Eaton announced a multi-year restructuring initiative to reduce its cost structure and gain efficiencies in all business segments and at corporate in order to respond to declining market conditions. Restructuring charges in the second quarter and first six months of 2016 were $35 and $98, respectively, and were $4 and $14 in 2015, respectively. These charges were primarily comprised of severance costs. Restructuring charges are anticipated to be $145 in 2016 and $130 in 2017. The projected annualized savings from these restructuring actions are expected to be $423, when fully realized in 2018.

RESULTS OF OPERATIONS
Non-GAAP Financial Measures
The following discussion of Consolidated Financial Results and Business Segment Results of Operations includes certain non-GAAP financial measures. These financial measures include operating earnings, operating earnings per ordinary share, and operating profit before acquisition integration charges for each business segment as well as corporate, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of operating earnings and operating earnings per ordinary share to the most directly comparable GAAP measure is included in the table below. Operating profit before acquisition integration charges is reconciled in the discussion of the operating results of each business segment, and excludes acquisition integration expense related to the integration of Ephesus Lighting, Inc. and Oxalis Group Ltd. in 2016 and primarily Cooper Industries plc in 2015. Management believes that these financial measures are useful to investors because they exclude certain transactions, allowing investors to more easily compare Eaton’s financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment. For additional information on acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.


23

Table of Contents

Consolidated Financial Results
 
Three months ended
June 30
 
Decrease
 
Six months ended
June 30
 
Decrease
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
5,080

 
$
5,372

 
(5
)%
 
$
9,893

 
$
10,595

 
(7
)%
Gross profit
1,661

 
1,697

 
(2
)%
 
3,183

 
3,327

 
(4
)%
Percent of net sales
32.7
%
 
31.6
%
 
 
 
32.2
%
 
31.4
%
 
 
Income before income taxes
553

 
598

 
(8
)%
 
995

 
1,103

 
(10
)%
Net income
492

 
535

 
(8
)%
 
895

 
1,002

 
(11
)%
Less net income for noncontrolling interests
(1
)
 

 
 
 

 
(1
)
 
 
Net income attributable to Eaton
   ordinary shareholders
491

 
535

 
(8
)%
 
895

 
1,001

 
(11
)%
Excluding acquisition integration charges,
  after-tax (Note 3)
1

 
8

 
 
 
1

 
15

 
 
Operating earnings
$
492

 
$
543

 
(9
)%
 
$
896

 
$
1,016

 
(12
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share attributable to Eaton ordinary
    shareholders - diluted
$
1.07

 
$
1.14

 
(6
)%
 
$
1.95

 
$
2.13

 
(8
)%
Excluding per share impact of acquisition
   integration charges costs, after-tax (Note 3)

 
0.02

 
 
 

 
0.03

 
 
Operating earnings per ordinary share
$
1.07

 
$
1.16

 
(8
)%
 
$
1.95

 
$
2.16

 
(10
)%
Net Sales
Net sales decreased 5% in the second quarter of 2016 compared to the second quarter of 2015 due to a decrease of 4% in organic sales and a decrease of 1% from the impact of negative currency translation. Net sales decreased 7% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 5% in organic sales and a 2% decrease from the impact of negative currency translation. The decrease in organic sales in the second quarter and first six months of 2016 was primarily due to weakening demand in several of the Company's end markets.
Gross Profit
Gross profit margin increased from 31.6% in the second quarter of 2015 to 32.7% in the second quarter of 2016. Gross profit margin increased from 31.4% in the first six months of 2015 compared to 32.2% in the first six months of 2016. The increase in gross margin in the second quarter and first six months of 2016 was primarily due to cost savings from restructuring actions and other cost control measures, partially offset by lower volumes, unfavorable product mix, and higher restructuring charges.
Income Taxes
The effective income tax rate for the second quarter and first six months of 2016 was expense of 11%, and 10%, respectively, compared to an expense of 11% and 9% for the second quarter and first six months of 2015. The increase in the effective tax rate in the first six months of 2016 was primarily due to more income earned in higher tax jurisdictions.
Operating Earnings
Operating earnings, a non-GAAP measure discussed above in Non-GAAP Financial Measures, of $492 in the second quarter of 2016 decreased 9% compared to Operating earnings of $543 in the second quarter of 2015. Operating earnings in the first six months of 2016 was $896, a decrease of 12% compared to $1,016 in the first six months of 2015. The decrease in Operating earnings in the second quarter and first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by savings from cost control measures and restructuring actions, as well as a decrease in pension and other postretirement benefits expense.
Operating earnings per ordinary share decreased to $1.07 in the second quarter of 2016 compared to $1.16 in the second quarter of 2015. Operating earnings per ordinary share decreased to $1.95 in the first six months of 2016 compared to $2.16 in the first six months of 2015. The decrease in Operating earnings per ordinary share in the second quarter and first six months of 2016 was due to lower Operating earnings, partially offset by the impact of the Company's share repurchases over the past year.

24

Table of Contents

Business Segment Results of Operations
The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.
Electrical Products
 
Three months ended
June 30
 
Increase
 
Six months ended
June 30
 
Increase
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
1,784

 
$
1,784

 
%
 
$
3,464

 
$
3,475

 
 %
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
322

 
$
276

 
17
%
 
$
593

 
$
536

 
11
 %
Operating margin
18.0
%
 
15.5
%
 
 
 
17.1
%
 
15.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$
1

 
$
6

 
 
 
$
1

 
$
12

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
323

 
$
282

 
15
%
 
$
594

 
$
548

 
8
 %
Operating margin
18.1
%
 
15.8
%
 
 
 
17.1
%
 
15.8
%
 
 
Net sales were broadly flat in the second quarter and first six months of 2016 compared to the second quarter and first six months of 2015, with an increase of 1% in organic sales offset by a decrease of 1% from the impact of negative currency translation in both periods. By region, organic sales grew in the Americas, Europe and Middle East, while sales declined in Asia Pacific.
Operating margin before acquisition integration charges increased from 15.8% in the second quarter of 2015 to 18.1% in the second quarter of 2016. Operating margin before acquisition integration charges increased from 15.8% in the first six months of 2015 to 17.1% in first six months of 2016. The increase in operating margin in the second quarter and first six months of 2016 compared to the second quarter and first six months of 2015 was due to savings from restructuring actions and other cost control measures, partially offset by higher restructuring charges and unfavorable product mix.
Electrical Systems and Services
 
Three months ended
June 30
 
Decrease
 
Six months ended
June 30
 
Decrease
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
1,429

 
$
1,502

 
(5
)%
 
$
2,771

 
$
2,950

 
(6
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
178

 
$
223

 
(20
)%
 
$
337

 
$
409

 
(18
)%
Operating margin
12.5
%
 
14.8
%
 
 
 
12.2
%
 
13.9
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$

 
$
4

 
 
 
$
1

 
$
7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
178

 
$
227

 
(22
)%
 
$
338

 
$
416

 
(19
)%
Operating margin
12.5
%
 
15.1
%
 
 
 
12.2
%
 
14.1
%
 
 
Net sales decreased 5% in the second quarter of 2016 compared to the second quarter of 2015 due to a decrease of 3% in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 6% in the first six months of 2016 compared to the first six months 2015 due to a decrease of 4% in organic sales and decrease of 2% from the impact of negative currency translation. The organic sales decline during the second quarter and first six months of 2016 was primarily due to weakness in industrial projects and the oil and gas market within the Americas and Asia Pacific regions.

25

Table of Contents

Operating margin before acquisition integration charges decreased from 15.1% in the second quarter of 2015 to 12.5% in the second quarter of 2016. Operating margin before acquisition integration charges decreased from 14.1% in the first six months of 2015 to 12.2% in the first six months of 2016. The decrease in operating margin in the second quarter and first six months of 2016 was primarily due to lower sales volumes, unfavorable product mix, higher restructuring charges, and a litigation charge, partially offset by savings from restructuring actions and other cost control measures.
Hydraulics
 
Three months ended
June 30
 
Decrease
 
Six months ended
June 30
 
Decrease
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
589

 
$
643

 
(8
)%
 
$
1,140

 
$
1,308

 
(13
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
59

 
$
74

 
(20
)%
 
$
100

 
$
140

 
(29
)%
Operating margin
10.0
%
 
11.5
%
 
 
 
8.8
%
 
10.7
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquisition integration charges
$

 
$
1

 
 
 
$

 
$
2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Before acquisition integration charges
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
59

 
$
75

 
(21
)%
 
$
100

 
$
142

 
(30
)%
Operating margin
10.0
%
 
11.7
%
 
 
 
8.8
%
 
10.9
%
 
 
Net sales decreased 8% in the second quarter of 2016 compared to the second quarter of 2015 due to a decrease of 7% in organic sales and a decrease of 1% from the impact of negative currency translation. Net sales decreased 13% for the first six months of 2016 compared to the first six months of 2015 due to a decrease of 11% in organic sales and a decrease of 2% from the impact of negative currency translation. The decline in organic sales in the second quarter and first six months of 2016 were primarily due to continued weakness in both the mobile and industrial markets.
Operating margin before acquisition integration charges decreased from 11.7% in the second quarter of 2015 to 10.0% in the second quarter of 2016. Operating margin before acquisition integration charges decreased from 10.9% in the first six months of 2015 to 8.8% in the first six months of 2016. The decrease in operating margin in the second quarter and first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by savings from restructuring actions and other cost control measures.
Aerospace
 
Three months ended
June 30
 
Increase
(decrease)
 
Six months ended
June 30
 
Increase
(decrease)
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
447

 
$
454

 
(2
)%
 
$
892

 
$
918

 
(3
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
83

 
$
77

 
8
 %
 
$
163

 
$
154

 
6
 %
Operating margin
18.6
%
 
17.0
%
 
 
 
18.3
%
 
16.8
%
 
 
Net sales in the second quarter of 2016 decreased 2% compared to the second quarter of 2015 due to a 2% impact from negative currency translation. Net sales decreased 3% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 2% in organic sales and a decrease of 1% from the impact of negative currency translation. The decline in organic sales in the first six months of 2016 primarily related to a decrease in military OEM markets, partially offset by growth in commercial markets.
Operating margin increased in the second quarter from 17.0% in 2015 to 18.6% in 2016, and in the first six months from 16.8% in 2015 to 18.3% in 2016. The increase in operating margin in the second quarter and first half of 2016 was due to savings from restructuring actions and reduced program development spending.

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Vehicle
 
Three months ended
June 30
 
Decrease
 
Six months ended
June 30
 
Decrease
 
2016
 
2015
 
 
2016
 
2015
 
Net sales
$
831

 
$
989

 
(16
)%
 
$
1,626

 
$
1,944

 
(16
)%
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit
$
137

 
$
190

 
(28
)%
 
$
255

 
$
354

 
(28
)%
Operating margin
16.5
%
 
19.2
%
 
 
 
15.7
%
 
18.2
%
 
 
Net sales decreased 16% in the second quarter of 2016 compared to the second quarter of 2015 due to a 14% decline in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 16% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 13% in organic sales and a decrease of 3% from the impact of negative currency translation. The change in organic sales in the second quarter and first six months of 2016 was primarily due to lower truck markets in the Americas, partially offset by growth in the European automotive market.
Operating margin decreased from 19.2% in the second quarter of 2015 to 16.5% in the second quarter of 2016. The decrease in the second quarter of 2016 was primarily the result of lower sales volumes partially offset by manufacturing efficiencies and cost savings from restructuring actions and other cost control measures. Operating margin decreased from 18.2% in the first six months of 2015 to 15.7% in the first six months of 2016. The decrease in the first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by manufacturing efficiencies and cost savings from restructuring actions.
Corporate Expense
 
Three months ended
June 30
 
Increase
(decrease)
 
Six months ended
June 30
 
Increase
(decrease)
 
2016
 
2015
 
 
2016
 
2015
 
Amortization of intangible assets
98

 
102

 
(4
)%
 
$
198

 
$
204

 
(3
)%
Interest expense - net
57

 
59

 
(3
)%
 
114

 
116

 
(2
)%
Pension and other postretirement
   benefits expense
13

 
33

 
(61
)%
 
27

 
61

 
(56
)%
Other corporate expense - net
58

 
48

 
21
 %
 
114

 
109

 
5
 %
Total corporate expense
$
226

 
$
242

 
(7
)%
 
$
453

 
$
490

 
(8
)%
Total corporate expense decreased 7% from $242 in the second quarter of 2015 to $226 in the second quarter of 2016. Total corporate expense decreased 8% from $490 in the first six months of 2015 to $453 in the first six months of 2016. The decrease in Total corporate expense for the second quarter and first six months 2016 was primarily due to a decrease in pension and other postretirement benefits expense resulting from a change to the spot rate approach for measuring service and interest costs, higher discount rates, and updated mortality tables.

LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION
Financial Condition and Liquidity
Eaton’s objective is to finance its business through operating cash flow and an appropriate mix of equity and long-term and short-term debt. By diversifying its debt maturity structure, Eaton reduces liquidity risk. The Company maintains access to the commercial paper markets through a commercial paper program, which is supported by credit facilities in the aggregate principal amount of $2,000. There were no borrowings outstanding under these revolving credit facilities at June 30, 2016. Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton believes its operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets are substantially in excess of the liquidity necessary to meet future operating needs of the business as well as scheduled payments of long-term debt.
Eaton was in compliance with each of its debt covenants for all periods presented.

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Table of Contents

Sources and Uses of Cash
Operating Cash Flow
Net cash provided by operating activities was $1,116 in the first six months of 2016, an increase of $460 in the source of cash compared to $656 in the first six months of 2015. The increase in net cash provided by operating activities in the first six months of 2016 was driven by lower pension contributions and lower working capital balances compared to the first six months of 2015.
Investing Cash Flow
Net cash used in investing activities was $204 in the first six months of 2016, a decrease of $3 in the use of cash compared to $207 in the first six months of 2015. The slight decrease was primarily driven by no business acquisitions completed in 2016 offset by lower sales of short-term investments.
Financing Cash Flow
Net cash used in financing activities was $865 in the first six months of 2016, a decrease of $47 in the use of cash compared to $912 in the first six months of 2015. The decrease in the use of cash was due to $164 less in payments on borrowings, which totaled $240 in 2016 and $404 in 2015. This was partially offset by an increase of $125 in share repurchases during the first six months of 2016 compared to the first six months of 2015.

FORWARD-LOOKING STATEMENTS
This Form 10-Q Report contains forward-looking statements concerning litigation developments, and the charges and benefits of restructuring actions, among other matters. These statements may discuss goals, intentions and expectations as to future trends, plans, events, results of operations or financial condition, or state other information relating to Eaton, based on current beliefs of management as well as assumptions made by, and information currently available to, management. Forward-looking statements generally will be accompanied by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “guidance,” “intend,” “may,” “possible,” “potential,” “predict,” “project” or other similar words, phrases or expressions. These statements should be used with caution and are subject to various risks and uncertainties, many of which are outside Eaton’s control. The following factors could cause actual results to differ materially from those in the forward-looking statements: unanticipated changes in the markets for the Company’s business segments; unanticipated downturns in business relationships with customers or their purchases from us; the availability of credit to customers and suppliers; competitive pressures on sales and pricing; unanticipated changes in the cost of material and other production costs, or unexpected costs that cannot be recouped in product pricing; the introduction of competing technologies; unexpected technical or marketing difficulties; unexpected claims, charges, litigation or dispute resolutions or unexpected developments in any such pending proceedings; strikes or other labor unrest; the impact of acquisitions and divestitures; unanticipated difficulties integrating acquisitions; new laws and governmental regulations; interest rate changes; tax rate changes or exposure to additional income tax liability; stock market and currency fluctuations; war, civil or political unrest or terrorism; and unanticipated deterioration of economic and financial conditions in the United States and around the world. Eaton does not assume any obligation to update these forward-looking statements.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in exposures to market risk since December 31, 2015.

ITEM 4.
CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures - Pursuant to SEC Rule 13a-15, an evaluation was performed under the supervision and with the participation of Eaton’s management, including Craig Arnold - Principal Executive Officer; and Richard H. Fearon - Principal Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, management concluded that Eaton’s disclosure controls and procedures were effective as of June 30, 2016.

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Table of Contents

Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.
During the second quarter of 2016, there was no change in Eaton's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS.
Information regarding the Company's current legal proceedings is presented in Note 7 of the Notes to the Condensed Consolidated Financial Statements.

ITEM 1A.
RISK FACTORS.
“Item 1A. Risk Factors” in Eaton's 2015 Form 10-K includes a discussion of the Company's risk factors. There have been no material changes from the risk factors described in the 2015 Form 10-K.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(c) Issuer's Purchases of Equity Securities
During the second quarter of 2016, 3.7 million ordinary shares were repurchased in the open market at a total cost of $224. These shares were repurchased under the program approved by the Board on February 24, 2016. A summary of the shares repurchased in the second quarter of 2016 follows:
Month
 
Total number
of shares
purchased
 
Average
price paid
per share
 
Total number of
shares purchased as
part of publicly
announced
plans or programs
 
Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)
April
 
580,423

 
$
63.03

 
580,423

 
$
2,445

May
 
1,684,538

 
$
62.60

 
1,684,538

 
$
2,340

June
 
1,451,314

 
$
56.76

 
1,451,314

 
$
2,258

Total
 
3,716,275

 
$
60.39

 
3,716,275

 
 

ITEM 6.
EXHIBITS.
Exhibits — See Exhibit Index attached.


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Table of Contents

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
 
EATON CORPORATION plc
 
 
 
 
Registrant
 
 
 
 
 
 
Date:
August 2, 2016
By:
/s/ Richard H. Fearon
 
 
 
 
Richard H. Fearon
 
 
 
 
Principal Financial Officer
 
 
 
(On behalf of the registrant and as Principal Financial Officer)
 
 
 
 
 


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Table of Contents

Eaton Corporation plc
Second Quarter 2016 Report on Form 10-Q
Exhibit Index
3 (i)
 
Certificate of Incorporation — Incorporated by reference to the Form S-8 filed November 30, 2012
 
 
 
3 (ii)
 
Articles of Association — Incorporated by reference to the Form 10-Q Report for the three months ended
March 31, 2016
 
 
 
3 (iii)
 
Memorandum of Association — Incorporated by reference to the Form 10-Q Report for the three months ended
March 31, 2016
 
 
 
4.1
 
Indenture dated as of November 20, 2012, among Turlock Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Eaton Corporation plc's Form 8-K Current Report filed on November 26, 2012 (Commission File No. 333-182303))
 
 
 
4.2
 
Supplemental Indenture No. 1, dated as of November 30, 2012, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of the registrant's Form S-4 filed on September 16, 2013)
 
 
 
4.3
 
Supplemental Indenture No. 2, dated as of January 8, 2013, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference Exhibit 4.3 of the registrant's Form S-4 filed on September 16, 2013)
 
 
 
4.4
 
Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its long-term debt other than those set forth in Exhibits 4.1-4.3 hereto
 
 
 
12
 
Ratio of Earnings to Fixed Charges — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.1
 
Certification of Principal Executive Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
31.2
 
Certification of Principal Financial Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.1
 
Certification of Principal Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
32.2
 
Certification of Principal Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *
 
 
 
101.INS
 
XBRL Instance Document *
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document *
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document *
 
 
 
101.DEF
 
XBRL Taxonomy Extension Label Definition Document *
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document *
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document *
_______________________________
*
 
Submitted electronically herewith.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended June 30, 2016 and 2015, (ii) Consolidated Statements of Comprehensive Income for the three months ended June 30, 2016 and 2015, (iii) Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) Notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2016.


31