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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts are in millions unless indicated otherwise (per share data assume dilution).
Note 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General Information and Basis of Presentation
Eaton Corporation plc (Eaton or the Company) is a power management company with 2020 net sales of $17.9 billion. Eaton’s mission is to improve the quality of life and the environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic and mechanical power – more safely, more efficiently and more reliably. Eaton has approximately 92,000 employees in 60 countries and sells products to customers in more than 175 countries.
The consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements and notes. Actual results could differ from these estimates. Management has evaluated subsequent events through the date the consolidated financial statements were filed with the Securities Exchange Commission.
The consolidated financial statements include the accounts of Eaton and all subsidiaries and other entities it controls. Intercompany transactions and balances have been eliminated. The equity method of accounting is used for investments in associate companies where the Company has significant influence and generally a 20% to 50% ownership interest. Equity investments are evaluated for impairment whenever events or circumstances indicate the book value of the investment exceeds fair value. An impairment would exist if there is an other-than-temporary decline in value. Investments in associate companies included in Other assets were $680 and $714 as of December 31, 2020 and December 31, 2019, respectively, and income from these investments is reported in Other (income) expense - net. Eaton does not have off-balance sheet arrangements with unconsolidated entities.
Eaton's functional currency is United States Dollars (USD). The functional currency for most subsidiaries is their local currency. Financial statements for these subsidiaries are translated at year-end exchange rates as to assets and liabilities and weighted-average exchange rates as to revenues and expenses. The resulting translation adjustments are recognized in Accumulated other comprehensive loss.
During the first quarter of 2020, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The new reportable segments are Electrical Americas and Electrical Global, which include the legacy Electrical Products and Electrical Systems and Services segments. Additionally, the Filtration and Golf Grip businesses previously included in the Hydraulics segment, and the electrical aerospace connectors business previously included in the Electrical Products segment, have been added to the Aerospace reportable segment as part of the reorganization. The Company also changed how it measures business segment performance in 2020 as it no longer allocates acquisition and divestiture charges to its operating segments. Historical segment information has been retrospectively adjusted to reflect these changes. See Note 17 for additional information related to the segments.
The Company recorded $37 and $13 of net gains for the years ended December 31, 2019 and 2018, respectively, related primarily to the remeasurement of intercompany loans denominated in a foreign currency and the currency exchange derivative contracts used to hedge these exposures. In the first quarter of 2020, Eaton changed the presentation of these gains from Other expense - net to Interest expense - net, and reclassified all prior periods.
In the first quarter of 2020, the Company also changed the presentation of the following items within the operating activities section of the Consolidated Statements of Cash Flows:
•The non-cash gains and losses associated with currency exchange derivative contracts have been moved from Other current assets and Other current liabilities to Other-net. This puts the non-cash impact of these derivatives on the same line as the non-cash impact from the balance sheet currency exposures they are used to hedge.
•The changes in both uncertain tax positions and prepaid taxes have been moved from Other-net and Other current assets, respectively, to Accrued income and other taxes. This places the cash flow impact from all taxes on the same line.
•The changes in non-trade receivables have been moved from Accounts receivable-net to Other current assets. This separates the cash flows associated with non-trade receivables from customer collections.
The net impact of these cash flow reclassifications made to prior periods was a $179 inflow for 2019 and a $206 outflow for 2018 to Changes in working capital with the corresponding impact to Other-net, resulting in no change to total operating cash flow.
Adoption of New Accounting Standards
Eaton adopted Accounting Standards Update 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, in the first quarter of 2020. This standard introduces new guidance for accounting for credit losses on receivables. The Company did not recognize a cumulative-effect adjustment to retained earnings as of January 1, 2020, as the adoption of this standard did not have a material impact on the consolidated financial statements.
Revenue Recognition
Sales are recognized when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and payment is due is not significant. Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the Consolidated Balance Sheet. See Note 3 for additional information.
Goodwill and Indefinite Life Intangible Assets
Goodwill is evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis. Goodwill is tested for impairment at the reporting unit level, and is based on the net assets for each reporting unit, including goodwill and intangible assets. The Company’s reporting units are equivalent to the reportable operating segments, except for the Aerospace segment which has two reporting units. Goodwill is assigned to each reporting unit, as this represents the lowest level that constitutes a business and is the level at which management regularly reviews the operating results. The Company performs a quantitative analysis using a discounted cash flow model and other valuation techniques, but may elect to perform a qualitative analysis. Additionally, goodwill is evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount.
The annual goodwill impairment test was performed using a qualitative analysis in 2020 and 2019, except for the eMobility segment in 2020 and the Hydraulics segment in 2019 which used a quantitative analysis. A qualitative analysis is performed by assessing certain trends and factors, including projected market outlook and growth rates, forecasted and actual sales and operating profit margins, discount rates, industry data, and other relevant qualitative factors. These trends and factors are compared to, and based on, the assumptions used in the most recent quantitative analysis performed for each reporting unit. The results of the qualitative analyses did not indicate a need to perform quantitative analysis.
Goodwill impairment testing was also performed using quantitative analyses in 2020 for the Electrical Americas, Electrical Global, Hydraulics and Aerospace reporting units due to a reorganization of the Company’s businesses discussed in Note 1 and Note 6, and in 2020 and 2019 as a result of the Hydraulics and Lighting businesses being classified as held for sale as discussed in Note 2. The Company used the relative fair value method to reallocate goodwill.
Quantitative analyses were performed by estimating the fair value for each reporting unit using a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The future cash flows were based on the Company's long-term operating plan and a terminal value was used to estimate the reporting unit's cash flows beyond the period covered by the operating plan. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions. Sensitivity analyses were performed around certain of these assumptions in order to assess the reasonableness of the assumptions and the resulting estimated fair values.
Based on these analyses performed in 2020 and 2019, the fair value of Eaton's reporting units continue to substantially exceed their respective carrying amounts and thus, no impairment exists.
Indefinite life intangible assets consist of certain trademarks. They are evaluated annually for impairment as of July 1 using either a quantitative or qualitative analysis to determine whether their fair values exceed their respective carrying amounts. Indefinite life intangible asset impairment testing for 2020 and 2019 was performed using a quantitative analysis. The Company determines the fair value of these assets using a royalty relief methodology similar to that employed when the associated assets were acquired, but using updated estimates of future sales, cash flows, and profitability. Additionally, indefinite life intangible assets are evaluated for impairment whenever an event occurs or circumstances change that would indicate that it is more likely than not that the asset is impaired. For 2020 and 2019, the fair value of indefinite lived intangible assets exceeded the respective carrying value.
For additional information about goodwill and other intangible assets, see Note 6.
Leases
The Company determines if an arrangement is a lease at inception. Operating lease assets and liabilities are recognized at the commencement date of the lease based on the present value of lease payments over the lease term. Lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. As most leases do not provide an implicit interest rate, Eaton uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. The length of a lease term includes options to extend or terminate the lease when it is reasonably certain that the Company will exercise those options. The Company made an accounting policy election to not recognize lease assets or liabilities for leases with a term of 12 months or less. Additionally, when accounting for leases, the Company combines payments for leased assets, related services and other components of a lease.
Other Long-Lived Assets
Depreciation and amortization for property, plant and equipment, and intangible assets subject to amortization, are generally computed by the straight-line method and included in Cost of products sold, Selling and administrative expense, and Research and development expense, as appropriate. Cost of buildings are depreciated generally over 40 years and machinery and equipment over 3 to 10 years. At December 31, 2020, the weighted-average amortization period for intangible assets subject to amortization was 18 years for patents and technology; 17 years for customer relationships; and 18 for certain trademarks. Software is amortized over 5 to 15 years.
Other long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Upon indications of impairment, assets and liabilities are grouped at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The asset group would be considered impaired when the estimated future net undiscounted cash flows generated by the asset group are less than its carrying value. Determining asset groups and underlying cash flows requires the use of significant judgment.
Retirement Benefits Plans
For the principal pension plans in the United States, Canada, Puerto Rico, and the United Kingdom, the Company uses a market-related value of plan assets to calculate the expected return on assets used to determine net periodic benefit costs. The market-related value of plan assets is a calculated value that recognizes changes in the fair value of plan assets over a five year period. All other plans use fair value of plan assets.
Net actuarial gains or losses are amortized to expense on a plan-by-plan basis when they exceed the accounting corridor. The Company’s corridors are set at either 8% or 10%, depending on the plan, of the greater of the plan assets or benefit obligations. Gains or losses outside of the corridor are subject to amortization over an average employee future service period that differs by plan. If most or all of the plan’s participants are no longer actively accruing benefits, the average life expectancy is used. The amortization periods on a weighted average basis for United States and Non-United States pension plans are approximately 23 years and 10 years, respectively. The amortization period for other postretirement benefits plans is 7 years.
Asset Retirement Obligations
A conditional asset retirement obligation is recognized at fair value when incurred if the fair value of the liability can be reasonably estimated. Uncertainty about the timing or method of settlement of a conditional asset retirement obligation would be considered in the measurement of the liability when sufficient information exists. Eaton believes that for substantially all of its asset retirement obligations, there is an indeterminate settlement date because the range of time over which the Company may settle the obligation is unknown or cannot be estimated. A liability for these obligations will be recognized when sufficient information is available to estimate fair value.
Income Taxes
Deferred income tax assets and liabilities are determined based on the difference between the financial statement and tax basis of the respective assets and liabilities, using enacted tax rates in effect for the year when the differences are expected to reverse. Deferred income tax assets are recognized for income tax loss carryforwards and income tax credit carryforwards. Judgment is required in determining and evaluating income tax provisions and valuation allowances for deferred income tax assets. Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. Eaton evaluates and adjusts these accruals based on changing facts and circumstances. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense. Eaton's policy is to recognize income tax effects from accumulated other comprehensive income when individual units of account are sold, terminated, or extinguished. For additional information about income taxes, see Note 11.
Derivative Financial Instruments and Hedging Activities
Eaton uses derivative financial instruments to manage the exposure to the volatility in raw material costs, currency, and interest rates on certain debt. These instruments are marked to fair value in the accompanying Consolidated Balance Sheets. Changes in the fair value of derivative assets or liabilities (i.e., gains or losses) are recognized depending upon the type of hedging relationship and whether an instrument has been designated as a hedge. For those instruments that qualify for hedge accounting, Eaton designates the hedging instrument, based upon the exposure being hedged, as a cash flow hedge, a fair value hedge, or a hedge of a net investment in a foreign operation. Changes in fair value of these instruments that do not qualify for hedge accounting are recognized immediately in net income. See Note 15 for additional information about hedges and derivative financial instruments.
Note 2.ACQUISITIONS AND DIVESTITURES OF BUSINESSES
Acquisition of controlling interest of Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S.
On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, with a primary focus on medium voltage solutions for industrial and utility customers. Its sales for the 12 months ended September 30, 2018 were $126. The purchase price for the shares was $214 on a cash and debt free basis. As required by the Turkish capital markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Global business segment.
Acquisition of Innovative Switchgear Solutions, Inc.
On July 19, 2019, Eaton acquired Innovative Switchgear Solutions, Inc. (ISG), a specialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. Its 2018 sales were approximately $18. ISG is reported within the Electrical Americas business segment.
Acquisition of Souriau-Sunbank Connection Technologies
On December 20, 2019, Eaton acquired the Souriau-Sunbank Connection Technologies (Souriau-Sunbank) business of TransDigm Group Inc. for a cash purchase price of $907, net of cash received. Headquartered in Versailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for harsh environments in the aerospace, defense, industrial, energy, and transport markets. Souriau-Sunbank is reported within the Aerospace business segment.
The acquisition of Souriau-Sunbank has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values on the acquisition date. During the measurement period which ended in December 2020, opening balance sheet adjustments were made to finalize Eaton's fair value estimates based on the final valuations received related primarily to intangible assets, goodwill, and the related deferred tax impact, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary
Allocation
|
|
Measurement Period
Adjustments
|
|
Final
Allocations
|
|
Accounts Receivable - net
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
60
|
|
|
Inventory
|
121
|
|
|
4
|
|
|
125
|
|
|
Prepaid expenses and other current assets
|
5
|
|
|
(1)
|
|
|
4
|
|
|
Property, plant and equipment
|
101
|
|
|
2
|
|
|
103
|
|
|
Other intangible assets
|
385
|
|
|
(15)
|
|
|
370
|
|
|
Other assets
|
8
|
|
|
—
|
|
|
8
|
|
|
Accounts payable
|
(34)
|
|
|
1
|
|
|
(33)
|
|
|
Other current liabilities
|
(51)
|
|
|
(7)
|
|
|
(58)
|
|
|
Other noncurrent liabilities
|
(130)
|
|
|
4
|
|
|
(126)
|
|
|
Total identifiable net assets
|
465
|
|
|
(12)
|
|
|
453
|
|
|
Noncontrolling interests
|
(4)
|
|
|
1
|
|
|
(3)
|
|
|
Goodwill
|
442
|
|
|
15
|
|
|
457
|
|
|
Total consideration, net of cash received
|
$
|
903
|
|
|
$
|
4
|
|
|
$
|
907
|
|
Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets recognized and represents the anticipated synergies of acquiring Souriau-Sunbank. Goodwill recognized as a result of the acquisition is not deductible for tax purposes. The estimated fair values of the customer relationships and technology intangible assets were $250 and $95, respectively. The Company generally determines the fair value of intangible assets acquired using third-party valuations that are prepared using discounted cash flow models that rely on the Company's estimates. These estimates require judgment of future revenue growth rates, future margins, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The estimated weighted-average useful lives was 20 years for customer relationships and 15 years for technology intangible assets. See Note 6 for additional information about goodwill and other intangible assets.
Eaton’s Consolidated Financial Statements include Souriau-Sunbank’s results of operations. Souriau-Sunbank's sales for the years ended December 31, 2020 and 2019 were $287 and $3, respectively.
Sale of Automotive Fluid Conveyance business
On December 31, 2019, Eaton sold its Automotive Fluid Conveyance Business. The transaction resulted in a pre-tax loss of $66 which was recorded in Other expense - net. This business was reported within the Vehicle business segment.
Acquisition of Power Distribution, Inc.
On February 25, 2020, Eaton acquired Power Distribution, Inc. a leading supplier of mission critical power distribution, static switching, and power monitoring equipment and services for data centers and industrial and commercial customers. The company is headquartered in Richmond, Virginia, and had 2019 sales of $125. Power Distribution, Inc. is reported within the Electrical Americas business segment.
Sale of Lighting business
On March 2, 2020, Eaton sold its Lighting business to Signify N.V. for a cash purchase price of $1.4 billion. The Company recognized a pre-tax gain of $221. The Lighting business, which had sales of $1.6 billion in 2019 as part of the Electrical Americas business segment, serves customers in commercial, industrial, residential, and municipal markets.
Pending Sale of Hydraulics business
On January 21, 2020, Eaton entered into an agreement to sell its Hydraulics business to Danfoss A/S, a Danish industrial company, for $3.3 billion in cash. Eaton’s Hydraulics business is a global leader in hydraulics components, systems, and services for industrial and mobile equipment. The business had sales of $1.8 billion and $2.2 billion for the years ended December 31, 2020 and 2019, respectively. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close by the end of the first quarter or early second quarter of 2021.
Assets and liabilities held for sale
During the fourth quarter of 2019 and first quarter of 2020, the Company determined the Lighting business and Hydraulics business, respectively, met the criteria to be classified as held for sale. Therefore, assets and liabilities of these businesses have been presented as held for sale in the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2020, respectively. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell. There was no write-down as fair values of both the Lighting business and Hydraulics business assets less their costs to sell exceeded their respective carrying value. Depreciation and amortization expense is not recorded for the period in which Other long-lived assets are classified as held for sale.
The Company used the relative fair value method to allocate goodwill to both the Lighting and Hydraulics businesses. The fair values of the Lighting business and Hydraulics business were estimated based on a combination of the prices paid to Eaton by Signify N.V. and Danfoss A/S, respectively, and a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions.
The assets and liabilities classified as held for sale for the Lighting business on the December 31, 2019 Consolidated Balance Sheet and the Hydraulics business on the December 31, 2020 Consolidated Balance Sheet are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
(Hydraulics business)
|
|
December 31, 2019
(Lighting business)
|
|
|
|
|
|
|
Accounts receivable
|
$
|
345
|
|
|
$
|
220
|
|
|
Inventory
|
369
|
|
|
161
|
|
|
Prepaid expenses and other current assets
|
18
|
|
|
10
|
|
|
Net property, plant and equipment
|
504
|
|
|
155
|
|
|
Goodwill
|
920
|
|
|
470
|
|
|
Other intangible assets
|
248
|
|
|
330
|
|
|
Operating lease assets
|
61
|
|
|
25
|
|
|
|
|
|
|
|
Deferred income taxes
|
6
|
|
|
—
|
|
|
Other noncurrent assets
|
16
|
|
|
6
|
|
|
Assets held for sale - current
|
$
|
2,487
|
|
|
$
|
1,377
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
241
|
|
|
$
|
184
|
|
|
Accrued compensation
|
26
|
|
|
7
|
|
|
Other current liabilities
|
101
|
|
|
102
|
|
|
Pension liabilities
|
60
|
|
|
3
|
|
|
Operating lease liabilities
|
35
|
|
|
17
|
|
|
Deferred income taxes
|
3
|
|
|
(1)
|
|
|
Other noncurrent liabilities
|
2
|
|
|
13
|
|
|
Liabilities held for sale - current
|
$
|
468
|
|
|
$
|
325
|
|
|
|
|
|
|
The Lighting business and Hydraulics business did not meet the criteria to be classified as discontinued operations as neither of these sales represent a strategic shift that will have a major effect on the Company's operations.
Agreement to Acquire a 50% stake in HuanYu High Tech
On December 15, 2020, Eaton signed an agreement to acquire a 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region. HuanYu High Tech had 2019 sales of $106 and has production operations in Wenzhou, China. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close in the second quarter of 2021. Eaton expects to account for this investment on the equity method of accounting and will report it within the Electrical Global business segment.
Agreement to Acquire Tripp Lite
On January 28, 2021, Eaton signed an agreement to acquire Tripp Lite, a leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas. Under the terms of the agreement, Eaton will pay $1.65 billion for Tripp Lite. The transaction is subject to customary closing conditions and is expected to close in the middle of 2021. Tripp Lite will be reported within the Electrical Americas business segment.
Agreement to Acquire Cobham Mission Systems
On January 31, 2021, Eaton signed an agreement to acquire Cobham Mission Systems (CMS), a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. Under the terms of the agreement, Eaton will pay $2.83 billion. The transaction is subject to customary closing conditions and is expected to close in the second half of 2021. CMS will be reported within the Aerospace business segment.
Note 3. REVENUE RECOGNITION
Sales are recognized when obligations under the terms of the contract are satisfied and control of promised goods or services have transferred to our customers. Sales are measured at the amount of consideration the Company expects to be paid in exchange for these products or services.
The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when title and risk and rewards of ownership have transferred to the customer. Sales recognized over time are less than 5% of Eaton’s Consolidated Net Sales. Sales recognized over time are generally accounted for using an input measure to determine progress completed at the end of the period. Sales for service contracts generally are recognized as the services are provided. For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements, we generally allocate sales price to each distinct obligation based on the price of each item sold in separate transactions.
Due to the nature of the work required to be performed for obligations recognized over time, Eaton estimates total costs by contract. The estimate of total costs are subject to judgment. Estimated amounts are included in the recognized sales price to the extent it is not probable that a significant reversal of cumulative sales will occur. Additionally, contracts can be modified to account for changes in contract specifications, requirements or sale price. The effect of a contract modification on the sales price or adjustments to the measure of completion under the input method are recognized as adjustments to revenue on a cumulative catch-up basis.
Payment terms vary by the type and location of the customer and the products or services offered. Generally, the time between when revenue is recognized and when payment is due is not significant. Eaton does not evaluate whether the selling price includes a financing interest component for contracts that are less than a year. Sales, value added, and other taxes collected concurrent with revenue are excluded from sales. Shipping and handling costs are treated as fulfillment costs and are included in Cost of products sold.
Eaton records reductions to sales for returns, and customer and distributor incentives, primarily comprised of rebates, at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. The rebate programs offered vary across businesses due to the numerous markets Eaton serves, but the most common incentives relate to amounts paid or credited to customers for achieving defined volume levels. Returns are estimated at the time of the sale primarily based on historical experience and are recorded gross on the Consolidated Balance Sheet.
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they are typically earned at the completion of the contract when the customer is invoiced or when the customer pays Eaton.
Sales of products and services varies by segment and are discussed in Note 17.
In the Electrical Americas segment, sales contracts are primarily for electrical components, industrial components, power distribution and assemblies, residential products, single and three phase power quality, wiring devices, circuit protection, utility power distribution, power reliability equipment, and services that are primarily produced and sold in North and South America. The majority of the sales in this segment contain performance obligations satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. However, certain power distribution and power quality services are recognized over time.
In the Electrical Global segment, sales contracts are primarily for electrical components, industrial components, power distribution and assemblies, single phase and three phase power quality, and services that are primarily produced and sold outside of North and South America, as well as hazardous duty electrical equipment, emergency lighting, fire detection, intrinsically safe explosion-proof instrumentation, and structural support systems that are produced and sold globally. The majority of the sales contracts in this segment contain performance obligations satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. However, certain power distribution and power quality services are recognized over time.
Many of the products and services in power distribution and power quality services meet the definition of continuous transfer of control to customers and are recognized over time. These products are engineered to a customer’s design specifications, have no alternative use to Eaton, and are controlled by the customer as evidenced by the customer’s contractual ownership of the work in process or our right to payment for work performed to date plus a reasonable margin. As control is transferring over time, sales are recognized based on the extent of progress towards completion of the obligation. Eaton generally uses an input method to determine the progress completed and sales are recorded proportionally as costs are incurred. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer.
In the Hydraulics segment, sales contracts are primarily for hydraulic components and systems for industrial and mobile equipment. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time when we ship the product from our facility.
In the Aerospace segment, sales contracts are primarily for aerospace fuel, hydraulics, and pneumatic systems for commercial and military use, as well as filtration systems for industrial applications. These sales contracts are primarily based on a customer’s purchase order, and frequently covered by terms and conditions included in a long-term agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility. Our military contracts are primarily fixed-price contracts that are not subject to performance-based payments or progress payments from the customer.
In the Vehicle segment, sales contracts are primarily for drivetrains, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks, and commercial vehicles. These sales contracts are primarily based on a customer’s purchase order or a blanket purchase order subject to firm releases, frequently covered by terms and conditions included in a master supply agreement. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In the eMobility segment, sales contracts are primarily for electronic and mechanical components and systems that improves the power management and performance of both on-road and off-road vehicles. These sales contracts are primarily based on a customer’s purchase order. In this segment, performance obligations are generally satisfied at a point in time either when we ship the product from our facility, or when it arrives at the customer’s facility.
In limited circumstances, primarily in the Electrical and Vehicle segments, Eaton sells separately-priced warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Sales for these separately-priced warranties are recorded based on their stand-alone selling price and are recognized as revenue over the length of the warranty period.
The Company’s six operating segments and the following tables disaggregate sales by lines of businesses, geographic destination, market channel or end market.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Net sales
|
|
|
Products
|
|
Systems
|
|
Total
|
|
Electrical Americas
|
|
|
$
|
2,255
|
|
|
$
|
4,425
|
|
|
$
|
6,680
|
|
|
Electrical Global
|
|
|
2,608
|
|
|
2,095
|
|
|
4,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Rest of World
|
|
|
|
Hydraulics
|
|
|
$
|
796
|
|
|
$
|
1,046
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Equipment Manufacturers
|
|
Aftermarket
|
|
Industrial and Other
|
|
|
|
Aerospace
|
$
|
986
|
|
|
$
|
685
|
|
|
$
|
552
|
|
|
2,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Passenger and Light Duty
|
|
|
|
Vehicle
|
|
|
$
|
1,060
|
|
|
$
|
1,058
|
|
|
2,118
|
|
|
|
|
|
|
|
|
|
|
|
eMobility
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
17,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Net sales
|
|
|
Products
|
|
Systems
|
|
Total
|
|
Electrical Americas
|
|
|
$
|
3,675
|
|
|
$
|
4,500
|
|
|
$
|
8,175
|
|
|
Electrical Global
|
|
|
2,782
|
|
|
2,390
|
|
|
5,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Rest of World
|
|
|
|
Hydraulics
|
|
|
$
|
1,000
|
|
|
$
|
1,204
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Equipment Manufacturers
|
|
Aftermarket
|
|
Industrial and Other
|
|
|
|
Aerospace
|
$
|
1,178
|
|
|
$
|
859
|
|
|
$
|
443
|
|
|
2,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Passenger and Light Duty
|
|
|
|
Vehicle
|
|
|
$
|
1,538
|
|
|
$
|
1,500
|
|
|
3,038
|
|
|
|
|
|
|
|
|
|
|
|
eMobility
|
|
|
|
|
|
|
321
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
21,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Net sales
|
|
|
Products
|
|
Systems
|
|
Total
|
|
Electrical Americas
|
|
|
$
|
3,577
|
|
|
$
|
4,337
|
|
|
$
|
7,914
|
|
|
Electrical Global
|
|
|
2,832
|
|
|
2,327
|
|
|
5,159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Rest of World
|
|
|
|
Hydraulics
|
|
|
$
|
1,078
|
|
|
$
|
1,314
|
|
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
Original Equipment Manufacturers
|
|
Aftermarket
|
|
Industrial and Other
|
|
|
|
Aerospace
|
$
|
1,102
|
|
|
$
|
766
|
|
|
$
|
467
|
|
|
2,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial
|
|
Passenger and Light Duty
|
|
|
|
Vehicle
|
|
|
$
|
1,759
|
|
|
$
|
1,730
|
|
|
3,489
|
|
|
|
|
|
|
|
|
|
|
|
eMobility
|
|
|
|
|
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
21,609
|
|
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, unbilled receivables (revenue recognized exceeds amount billed to the customer), and deferred revenue (advance payments and billings in excess of revenue recognized). Accounts receivables from customers were $2,539 and $3,090 at December 31, 2020 and December 31, 2019, respectively. Amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. These assets and liabilities are reported on the Consolidated Balance Sheets on a contract-by-contract basis at the end of each reporting period. Unbilled receivables were $90 and $101 at December 31, 2020 and December 31, 2019, respectively, and are recorded in Prepaid expenses and other current assets. The decrease in unbilled receivables was primarily due to billings to customers during 2020, partially offset by revenue recognized and not yet billed.
Changes in the deferred revenue liabilities are as follows:
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
|
Balance at January 1, 2019
|
$
|
248
|
|
|
Customer deposits and billings
|
982
|
|
|
Revenue recognized in the period
|
(993)
|
|
|
Translation
|
3
|
|
|
Deferred revenue reclassified to held for sale
|
(6)
|
|
|
Balance at December 31, 2019
|
$
|
234
|
|
|
Customer deposits and billings
|
1,041
|
|
|
Revenue recognized in the period
|
(1,014)
|
|
|
Translation
|
7
|
|
|
Deferred revenue reclassified to held for sale
|
(11)
|
|
|
Balance at December 31, 2020
|
$
|
257
|
|
A significant portion of open orders placed with Eaton are by original equipment manufacturers or distributors. These open orders are not considered firm as they have been historically subject to releases by customers. In measuring backlog of unsatisfied or partially satisfied obligations, only the amount of orders to which customers are firmly committed are included. Using this criterion, total backlog at December 31, 2020 was approximately $5.6 billion. At December 31, 2020, Eaton expects to recognize approximately 88% of this backlog in the next twelve months and the rest thereafter.
Note 4. CREDIT LOSSES FOR RECEIVABLES
Receivables are exposed to credit risk based on the customers' ability to pay which is influenced by, among other factors, their financial liquidity position. Eaton's receivables are generally short-term in nature with a majority outstanding less than 90 days.
Eaton performs ongoing credit evaluation of its customers and maintains sufficient allowances for potential credit losses. The Company evaluates the collectability of its receivables based on the length of time the receivable is past due, and any anticipated future write-off based on historic experience adjusted for market conditions. The Company's segments, supported by our global credit department, perform the credit evaluation and monitoring process to estimate and manage credit risk. The process includes an evaluation of credit losses for both the overall segment receivable and specific customer balances. The process also includes review of customer financial information and credit ratings, approval and monitoring of customer credit limits, and an assessment of market conditions. The Company may also require prepayment from customers to mitigate credit risk. Receivable balances are written off against an allowance for credit losses after a final determination of collectability has been made.
Accounts receivable are net of an allowance for credit losses of $48 and $49 at December 31, 2020 and 2019. The change in the allowance for credit losses includes expense and net write-offs, none of which is significant.
Note 5. INVENTORY
Inventory is carried at lower of cost or net realizable value using the first-in, first-out (FIFO) method. Cost components include raw materials, purchased components, direct labor, indirect labor, utilities, depreciation, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and costs of the distribution network.
The components of inventory follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2020
|
|
2019
|
|
Raw materials
|
$
|
803
|
|
|
$
|
986
|
|
|
Work-in-process
|
498
|
|
|
640
|
|
|
Finished goods
|
808
|
|
|
1,179
|
|
|
Total inventory
|
$
|
2,109
|
|
|
$
|
2,805
|
|
Note 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by segment follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2019
|
|
|
|
Additions
|
|
Goodwill reclassified to held for sale
|
|
Translation
|
|
December 31, 2019
|
|
Additions
|
|
Goodwill reclassified to held for sale
|
|
Translation
|
|
December 31, 2020
|
|
Electrical Americas
|
$
|
6,819
|
|
|
|
|
$
|
8
|
|
|
$
|
(470)
|
|
|
$
|
(5)
|
|
|
$
|
6,352
|
|
|
$
|
97
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
6,456
|
|
|
Electrical Global
|
3,942
|
|
|
|
|
155
|
|
|
—
|
|
|
9
|
|
|
4,106
|
|
|
7
|
|
|
—
|
|
|
182
|
|
|
4,295
|
|
|
Hydraulics
|
931
|
|
|
|
|
—
|
|
|
—
|
|
|
(10)
|
|
|
921
|
|
|
—
|
|
|
(907)
|
|
|
(14)
|
|
|
—
|
|
|
Aerospace
|
1,264
|
|
|
|
|
442
|
|
|
—
|
|
|
—
|
|
|
1,706
|
|
|
15
|
|
|
—
|
|
|
56
|
|
|
1,777
|
|
|
Vehicle
|
292
|
|
|
|
|
—
|
|
|
—
|
|
|
(1)
|
|
|
291
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
293
|
|
|
eMobility
|
80
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
82
|
|
|
Total
|
$
|
13,328
|
|
|
|
|
$
|
605
|
|
|
$
|
(470)
|
|
|
$
|
(7)
|
|
|
$
|
13,456
|
|
|
$
|
119
|
|
|
$
|
(907)
|
|
|
$
|
235
|
|
|
$
|
12,903
|
|
During the first quarter of 2020, Eaton re-segmented certain reportable operating segments due to a reorganization of the Company's businesses. The Company used the relative fair value method to reallocate goodwill to the associated reporting units impacted by the reorganization resulting in goodwill of $6.4 billion and $4.0 billion being allocated to the Electrical Americas and Electrical Global reportable segments, respectively. The Company’s reporting units are equivalent to the reportable operating segments, except for the Aerospace segment which has two reporting units.
The fair values of the Electrical Americas and Electrical Global reportable segments were estimated based on a discounted cash flow model. The model includes estimates of future cash flows, future growth rates, terminal value amounts, and the applicable weighted-average cost of capital used to discount those estimated cash flows. The weighted-average cost of capital is an estimate of the overall after-tax rate of return required by equity and debt market holders of a business enterprise. These analyses require the exercise of judgments, including judgments about appropriate discount rates, perpetual growth rates, revenue growth, and margin assumptions.
The fair value of the Hydraulics reportable segment was estimated based on a combination of the price to be paid to Eaton by Danfoss A/S and a discounted cash flow model. See Note 2 for additional information about the allocation of goodwill to the Hydraulics reportable segment.
The Filtration and Golf Grip businesses previously included in the Hydraulics reportable segment, and the electrical aerospace connectors business previously included in the Electrical Products segment, have been added to the Aerospace segment as part of the reorganization.
The 2020 additions to goodwill primarily relate to the anticipated synergies of acquiring Power Distribution, Inc. The 2019 additions to goodwill relate to the anticipated synergies of acquiring Souriau-Sunbank, Ulusoy Elektrik and ISG.
A summary of other intangible assets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2020
|
|
2019
|
|
|
Historical
cost
|
|
Accumulated
amortization
|
|
Historical
cost
|
|
Accumulated
amortization
|
|
Intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
1,382
|
|
|
|
|
$
|
1,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
3,415
|
|
|
$
|
1,795
|
|
|
$
|
3,260
|
|
|
$
|
1,634
|
|
|
Patents and technology
|
1,428
|
|
|
773
|
|
|
1,542
|
|
|
704
|
|
|
Trademarks
|
970
|
|
|
505
|
|
|
1,057
|
|
|
457
|
|
|
Other
|
91
|
|
|
38
|
|
|
92
|
|
|
34
|
|
|
Total intangible assets subject to amortization
|
$
|
5,904
|
|
|
$
|
3,111
|
|
|
$
|
5,951
|
|
|
$
|
2,829
|
|
Amortization expense related to intangible assets subject to amortization in 2020, and estimated amortization expense for each of the next five years, follows:
|
|
|
|
|
|
|
|
2020
|
$
|
342
|
|
|
2021
|
339
|
|
|
2022
|
331
|
|
|
2023
|
287
|
|
|
2024
|
277
|
|
|
2025
|
273
|
|
Note 7. LEASES
Eaton leases certain manufacturing facilities, warehouses, distribution centers, office space, vehicles, and equipment. Most real estate leases contain renewal options. The exercise of lease renewal options is at the Company's sole discretion. The Company's lease agreements typically do not contain any significant guarantees of asset values at the end of a lease or restrictive covenants. Payments within certain lease agreements are adjusted periodically for changes in an index or rate.
The components of lease expense follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
Operating lease cost
|
$
|
184
|
|
|
$
|
166
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of lease assets
|
6
|
|
|
5
|
|
|
|
|
Interest on lease liabilities
|
1
|
|
|
1
|
|
|
|
|
Short-term lease cost
|
18
|
|
|
46
|
|
|
|
|
Variable lease cost
|
3
|
|
|
22
|
|
|
|
|
Sublease income
|
(2)
|
|
|
(3)
|
|
|
|
|
Total lease cost
|
$
|
210
|
|
|
$
|
237
|
|
|
|
Rental expense was $232 for the year ended December 31, 2018. The net gains recorded on sale leaseback transactions were $9 and $16 for the years ended December 31, 2020 and 2019, respectively.
Supplemental cash flow information related to leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash outflows - payments on operating leases
|
$
|
(144)
|
|
|
$
|
(168)
|
|
|
Operating cash outflows - interest payments on finance leases
|
(1)
|
|
|
(1)
|
|
|
Financing cash outflows - payments on finance lease obligations
|
(8)
|
|
|
(6)
|
|
|
|
|
|
|
|
Lease assets obtained in exchange for new lease obligations, including leases acquired:
|
|
|
|
|
Operating leases
|
$
|
144
|
|
|
$
|
114
|
|
|
Finance leases
|
16
|
|
|
24
|
|
Supplemental balance sheet information related to leases follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2020
|
|
2019
|
|
Operating Leases
|
|
|
|
|
Operating lease assets
|
$
|
428
|
|
|
$
|
436
|
|
|
|
|
|
|
|
Other current liabilities
|
116
|
|
|
121
|
|
|
Operating lease liabilities
|
326
|
|
|
331
|
|
|
Total operating lease liabilities
|
$
|
442
|
|
|
$
|
452
|
|
|
|
|
|
|
|
Finance Leases
|
|
|
|
|
Land and buildings
|
$
|
13
|
|
|
$
|
24
|
|
|
Machinery and equipment
|
38
|
|
|
18
|
|
|
Accumulated depreciation
|
(16)
|
|
|
(16)
|
|
|
Net property, plant and equipment
|
$
|
35
|
|
|
$
|
26
|
|
|
|
|
|
|
|
Current portion of long-term debt
|
$
|
8
|
|
|
$
|
6
|
|
|
Long-term debt
|
30
|
|
|
21
|
|
|
Total finance lease liabilities
|
$
|
38
|
|
|
$
|
27
|
|
|
|
|
|
|
|
Weighted-average remaining lease term
|
|
|
|
|
Operating leases
|
5.5 years
|
|
5.1 years
|
|
Finance leases
|
7.4 years
|
|
6.8 years
|
|
|
|
|
|
|
Weighted-average discount rate
|
|
|
|
|
Operating leases
|
3.3
|
%
|
|
3.7
|
%
|
|
Finance leases
|
3.5
|
%
|
|
7.6
|
%
|
Maturities of lease liabilities at December 31, 2020 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
2021
|
$
|
129
|
|
|
$
|
10
|
|
|
2022
|
103
|
|
|
8
|
|
|
2023
|
78
|
|
|
6
|
|
|
2024
|
54
|
|
|
5
|
|
|
2025
|
30
|
|
|
2
|
|
|
Thereafter
|
91
|
|
|
11
|
|
|
Total lease payments
|
485
|
|
|
42
|
|
|
Less imputed interest
|
43
|
|
|
4
|
|
|
Total present value of lease liabilities
|
$
|
442
|
|
|
$
|
38
|
|
Note 8. DEBT
A summary of long-term debt, including the current portion, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.875% debentures due 2020 ($150 converted to floating rate by interest rate swap)
|
$
|
—
|
|
|
$
|
239
|
|
|
3.47% notes due 2021 ($275 converted to floating rate by interest rate swap)
|
300
|
|
|
300
|
|
|
0.02% Euro notes due 2021
|
737
|
|
|
674
|
|
|
8.10% debentures due 2022 ($100 converted to floating rate by interest rate swap)
|
100
|
|
|
100
|
|
|
2.75% senior notes due 2022 ($1,400 converted to floating rate by interest rate swap)
|
1,600
|
|
|
1,600
|
|
|
3.68% notes due 2023 ($200 converted to floating rate by interest rate swap)
|
300
|
|
|
300
|
|
|
|
|
|
|
|
0.75% Euro notes due 2024
|
676
|
|
|
617
|
|
|
6.50% debentures due 2025
|
145
|
|
|
145
|
|
|
0.70% Euro notes due 2025
|
614
|
|
|
562
|
|
|
3.10% senior notes due 2027
|
700
|
|
|
700
|
|
|
7.65% debentures due 2029 ($50 converted to floating rate by interest rate swap)
|
200
|
|
|
200
|
|
|
4.00% senior notes due 2032
|
700
|
|
|
700
|
|
|
5.45% debentures due 2034 ($25 converted to floating rate by interest rate swap)
|
136
|
|
|
137
|
|
|
|
|
|
|
|
5.80% notes due 2037
|
240
|
|
|
240
|
|
|
4.15% senior notes due 2042
|
1,000
|
|
|
1,000
|
|
|
3.92% senior notes due 2047
|
300
|
|
|
300
|
|
|
5.25% to 7.875% notes (maturities ranging from 2024 to 2035, including $25 converted to floating rate by interest rate swap)
|
165
|
|
|
165
|
|
|
Other
|
144
|
|
|
88
|
|
|
Total long-term debt
|
8,057
|
|
|
8,067
|
|
|
Less current portion of long-term debt
|
(1,047)
|
|
|
(248)
|
|
|
Long-term debt less current portion
|
$
|
7,010
|
|
|
$
|
7,819
|
|
Substantially all these long-term debt instruments are fully and unconditionally guaranteed on an unsubordinated, unsecured basis by Eaton and certain of its direct and indirect subsidiaries (the Senior Notes). Further, as of December 31, 2020 all of these long-term debt instruments, except the 3.47% notes due 2021, the 0.02% Euro notes due 2021, the 3.68% notes due 2023, the 0.75% Euro notes due 2024, and the 0.70% Euro notes due 2025, are registered by Eaton Corporation under the Securities Act of 1933, as amended (the Registered Senior Notes).
The Company maintains long-term revolving credit facilities totaling $2,000, consisting of a $750 five-year revolving credit facility that will expire November 17, 2022, a $500 four-year revolving credit facility that will expire November 7, 2023, and a $750 five-year revolving credit facility that will expire November 7, 2024. The revolving credit facilities are used to support commercial paper borrowings and are fully and unconditionally guaranteed by Eaton and certain of its direct and indirect subsidiaries on an unsubordinated, unsecured basis. There were no borrowings outstanding under Eaton's revolving credit facilities at December 31, 2020 or 2019. The Company had available lines of credit of $1,010 from various banks primarily for the issuance of letters of credit, of which there was $268 outstanding at December 31, 2020. Borrowings outside the United States are generally denominated in local currencies.
Eaton is in compliance with each of its debt covenants for all periods presented.
Maturities of long-term debt for each of the next five years follow:
|
|
|
|
|
|
|
|
2021
|
$
|
1,047
|
|
|
2022
|
1,708
|
|
|
2023
|
306
|
|
|
2024
|
746
|
|
|
2025
|
762
|
|
Interest paid on debt follows:
|
|
|
|
|
|
|
|
2020
|
$
|
216
|
|
|
2019
|
279
|
|
|
2018
|
313
|
|
Note 9. RETIREMENT BENEFITS PLANS
Eaton has defined benefits pension plans and other postretirement benefits plans.
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
Other postretirement
liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Funded status
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets
|
$
|
3,463
|
|
|
$
|
3,433
|
|
|
$
|
2,137
|
|
|
$
|
1,903
|
|
|
$
|
20
|
|
|
$
|
23
|
|
|
Benefit obligations
|
(4,121)
|
|
|
(4,028)
|
|
|
(3,036)
|
|
|
(2,747)
|
|
|
(375)
|
|
|
(378)
|
|
|
Funded status
|
$
|
(658)
|
|
|
$
|
(595)
|
|
|
$
|
(899)
|
|
|
$
|
(844)
|
|
|
$
|
(355)
|
|
|
$
|
(355)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95
|
|
|
$
|
73
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current liabilities
|
(36)
|
|
|
(23)
|
|
|
(28)
|
|
|
(27)
|
|
|
(25)
|
|
|
(27)
|
|
|
Non-current liabilities
|
(622)
|
|
|
(572)
|
|
|
(966)
|
|
|
(890)
|
|
|
(330)
|
|
|
(328)
|
|
|
Total
|
$
|
(658)
|
|
|
$
|
(595)
|
|
|
$
|
(899)
|
|
|
$
|
(844)
|
|
|
$
|
(355)
|
|
|
$
|
(355)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in Accumulated other
comprehensive loss (pre-tax)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain) loss
|
$
|
1,046
|
|
|
$
|
1,096
|
|
|
$
|
1,005
|
|
|
$
|
879
|
|
|
$
|
1
|
|
|
$
|
(8)
|
|
|
Prior service cost (credit)
|
5
|
|
|
7
|
|
|
21
|
|
|
25
|
|
|
(3)
|
|
|
(17)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
1,051
|
|
|
$
|
1,103
|
|
|
$
|
1,026
|
|
|
$
|
904
|
|
|
$
|
(2)
|
|
|
$
|
(25)
|
|
Change in Benefit Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
Other postretirement
liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Balance at January 1
|
$
|
4,028
|
|
|
$
|
3,633
|
|
|
$
|
2,747
|
|
|
$
|
2,285
|
|
|
$
|
378
|
|
|
$
|
378
|
|
|
Service cost
|
97
|
|
|
91
|
|
|
73
|
|
|
58
|
|
|
2
|
|
|
2
|
|
|
Interest cost
|
103
|
|
|
138
|
|
|
45
|
|
|
57
|
|
|
9
|
|
|
14
|
|
|
Actuarial (gain) loss
|
223
|
|
|
435
|
|
|
217
|
|
|
315
|
|
|
11
|
|
|
14
|
|
|
Gross benefits paid
|
(330)
|
|
|
(270)
|
|
|
(121)
|
|
|
(102)
|
|
|
(49)
|
|
|
(60)
|
|
|
Currency translation
|
—
|
|
|
—
|
|
|
137
|
|
|
47
|
|
|
2
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan amendments
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Acquisitions and divestitures
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
Benefit obligation reclassified to held for sale
|
—
|
|
|
—
|
|
|
(65)
|
|
|
(4)
|
|
|
—
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
95
|
|
|
22
|
|
|
27
|
|
|
Balance at December 31
|
$
|
4,121
|
|
|
$
|
4,028
|
|
|
$
|
3,036
|
|
|
$
|
2,747
|
|
|
$
|
375
|
|
|
$
|
378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated benefit obligation
|
$
|
4,054
|
|
|
$
|
3,883
|
|
|
$
|
2,862
|
|
|
$
|
2,592
|
|
|
|
|
|
Actuarial losses related to changes in the United States and Non-United States benefit obligations in 2020 of $223 and $217, respectively, were primarily due to decreases in the discount rates used to measure the obligations, partially offset by curtailment gains related to amendments to freeze the Company's Unites States pension plans for its non-union employees. The freeze is effective January 1, 2021 for non-union U.S. employees whose retirement benefit was determined under a cash balance formula and effective January 1, 2026 for non-union U.S. employees whose retirement benefit is determined under a final average pay formula. Actuarial losses related to changes in the United States and Non-United States benefit obligations in 2019 of $435 and $315, respectively, were primarily due to decreases in the discount rates used to measure the obligations.
Change in Plan Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
Other postretirement
liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Balance at January 1
|
$
|
3,433
|
|
|
$
|
3,068
|
|
|
$
|
1,903
|
|
|
$
|
1,560
|
|
|
$
|
23
|
|
|
$
|
37
|
|
|
Actual return on plan assets
|
342
|
|
|
618
|
|
|
185
|
|
|
230
|
|
|
1
|
|
|
5
|
|
|
Employer contributions
|
18
|
|
|
17
|
|
|
104
|
|
|
102
|
|
|
23
|
|
|
15
|
|
|
Gross benefits paid
|
(330)
|
|
|
(270)
|
|
|
(121)
|
|
|
(102)
|
|
|
(49)
|
|
|
(60)
|
|
|
Currency translation
|
—
|
|
|
—
|
|
|
69
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
Plan assets reclassified to held for sale
|
—
|
|
|
—
|
|
|
(5)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
55
|
|
|
22
|
|
|
26
|
|
|
Balance at December 31
|
$
|
3,463
|
|
|
$
|
3,433
|
|
|
$
|
2,137
|
|
|
$
|
1,903
|
|
|
$
|
20
|
|
|
$
|
23
|
|
The components of pension plans with an accumulated benefit obligation in excess of plan assets at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Accumulated benefit obligation
|
$
|
4,054
|
|
|
$
|
3,883
|
|
|
$
|
2,586
|
|
|
$
|
1,028
|
|
|
Fair value of plan assets
|
3,463
|
|
|
3,433
|
|
|
1,756
|
|
|
242
|
|
The components of pension plans with a projected benefit obligation in excess of plan assets at December 31 follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Projected benefit obligation
|
$
|
4,121
|
|
|
$
|
4,028
|
|
|
$
|
2,763
|
|
|
$
|
2,502
|
|
|
Fair value of plan assets
|
3,463
|
|
|
3,433
|
|
|
1,770
|
|
|
1,585
|
|
Other postretirement benefit plans with accumulated postretirement benefit obligations in excess of plan assets have been disclosed in the Obligations and Funded Status table.
Changes in pension and other postretirement benefit liabilities recognized in Accumulated other comprehensive loss follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension liabilities
|
|
Non-United States
pension liabilities
|
|
Other postretirement
liabilities
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Balance at January 1
|
$
|
1,103
|
|
|
$
|
1,160
|
|
|
$
|
904
|
|
|
$
|
710
|
|
|
$
|
(25)
|
|
|
$
|
(52)
|
|
|
Prior service cost arising during the year
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Net loss (gain) arising during the year
|
112
|
|
|
52
|
|
|
141
|
|
|
231
|
|
|
10
|
|
|
11
|
|
|
Currency translation
|
—
|
|
|
—
|
|
|
48
|
|
|
15
|
|
|
—
|
|
|
1
|
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Less amounts included in expense during the year
|
(164)
|
|
|
(110)
|
|
|
(70)
|
|
|
(52)
|
|
|
13
|
|
|
14
|
|
|
Net change for the year
|
(52)
|
|
|
(57)
|
|
|
122
|
|
|
194
|
|
|
23
|
|
|
27
|
|
|
Balance at December 31
|
$
|
1,051
|
|
|
$
|
1,103
|
|
|
$
|
1,026
|
|
|
$
|
904
|
|
|
$
|
(2)
|
|
|
$
|
(25)
|
|
Benefits Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension benefit expense
|
|
Non-United States
pension benefit expense
|
|
Other postretirement
benefits expense
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
97
|
|
|
$
|
91
|
|
|
$
|
100
|
|
|
$
|
73
|
|
|
$
|
58
|
|
|
$
|
63
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Interest cost
|
103
|
|
|
138
|
|
|
122
|
|
|
45
|
|
|
57
|
|
|
52
|
|
|
9
|
|
|
14
|
|
|
13
|
|
|
Expected return on plan assets
|
(231)
|
|
|
(235)
|
|
|
(253)
|
|
|
(109)
|
|
|
(106)
|
|
|
(105)
|
|
|
—
|
|
|
(2)
|
|
|
(3)
|
|
|
Amortization
|
102
|
|
|
62
|
|
|
94
|
|
|
60
|
|
|
38
|
|
|
39
|
|
|
(13)
|
|
|
(14)
|
|
|
(13)
|
|
|
|
71
|
|
|
56
|
|
|
63
|
|
|
69
|
|
|
47
|
|
|
49
|
|
|
(2)
|
|
|
—
|
|
|
(1)
|
|
|
Settlements, curtailments and special termination benefits
|
62
|
|
|
48
|
|
|
46
|
|
|
10
|
|
|
14
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total expense
|
$
|
133
|
|
|
$
|
104
|
|
|
$
|
109
|
|
|
$
|
79
|
|
|
$
|
61
|
|
|
$
|
51
|
|
|
$
|
(2)
|
|
|
$
|
—
|
|
|
$
|
(1)
|
|
Total pension benefits expense of $165 for 2019 includes $8 of settlement expense related to the sale of the Automotive Fluid Conveyance Business discussed in Note 2. The components of retirement benefits expense other than service costs are included in Other expense - net.
Retirement Benefits Plans Assumptions
In 2018, 2019, and 2020, for purposes of determining liabilities related to the majority of its plans in the United States, the Company used mortality tables that are based on the Company's own experience and generational improvement scales that are based on MP-2018, MP-2019, and MP-2020, respectively.
To estimate the service and interest cost components of net periodic benefit cost for the vast majority of its defined benefits pension and other postretirement benefits plans, the Company used a spot rate approach by applying the specific spot rates along the yield curve used to measure the benefit obligation at the beginning of the period to the relevant projected cash flows.
Pension Plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
pension plans
|
|
Non-United States
pension plans
|
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
|
Assumptions used to determine benefit obligation at year-end
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
2.48
|
%
|
|
3.22
|
%
|
|
4.28
|
%
|
|
1.59
|
%
|
|
2.02
|
%
|
|
2.83
|
%
|
|
Rate of compensation increase
|
3.12
|
%
|
|
3.14
|
%
|
|
3.14
|
%
|
|
3.02
|
%
|
|
3.05
|
%
|
|
3.10
|
%
|
|
Interest rate used to credit cash balance plans
|
2.02
|
%
|
|
2.59
|
%
|
|
3.13
|
%
|
|
0.53
|
%
|
|
0.54
|
%
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions used to determine expense
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate used to determine benefit obligation
|
3.22
|
%
|
|
4.28
|
%
|
|
3.64
|
%
|
|
2.02
|
%
|
|
2.83
|
%
|
|
2.62
|
%
|
|
Discount rate used to determine service cost
|
3.34
|
%
|
|
4.39
|
%
|
|
3.78
|
%
|
|
2.78
|
%
|
|
4.02
|
%
|
|
3.54
|
%
|
|
Discount rate used to determine interest cost
|
2.75
|
%
|
|
3.94
|
%
|
|
3.19
|
%
|
|
1.82
|
%
|
|
2.56
|
%
|
|
2.31
|
%
|
|
Expected long-term return on plan assets
|
7.25
|
%
|
|
7.25
|
%
|
|
7.52
|
%
|
|
5.84
|
%
|
|
6.42
|
%
|
|
6.40
|
%
|
|
Rate of compensation increase
|
3.14
|
%
|
|
3.14
|
%
|
|
3.15
|
%
|
|
3.05
|
%
|
|
3.10
|
%
|
|
3.11
|
%
|
|
Interest rate used to credit cash balance plans
|
2.59
|
%
|
|
3.13
|
%
|
|
3.02
|
%
|
|
0.54
|
%
|
|
2.60
|
%
|
|
2.91
|
%
|
The expected long-term rate of return on pension assets was determined for each country and reflects long-term historical data taking into account each plan's target asset allocation. The expected long-term rates of return on pension assets for United States pension plans and Non-United States pension plans for 2021 are 6.75% and 5.62%, respectively. The discount rates were determined using appropriate bond data for each country.
Other Postretirement Benefits Plans
Substantially all of the obligation for other postretirement benefits plans relates to United States plans. Assumptions used to determine other postretirement benefits obligations and expense follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other postretirement
benefits plans
|
|
|
2020
|
|
2019
|
|
2018
|
|
Assumptions used to determine benefit obligation at year-end
|
|
|
|
|
|
|
Discount rate
|
2.37
|
%
|
|
3.13
|
%
|
|
4.23
|
%
|
|
Health care cost trend rate assumed for next year
|
7.05
|
%
|
|
6.95
|
%
|
|
7.10
|
%
|
|
Ultimate health care cost trend rate
|
4.75
|
%
|
|
4.75
|
%
|
|
4.75
|
%
|
|
Year ultimate health care cost trend rate is achieved
|
2030
|
|
2029
|
|
2028
|
|
|
|
|
|
|
|
|
Assumptions used to determine expense
|
|
|
|
|
|
|
Discount rate used to determine benefit obligation
|
3.13
|
%
|
|
4.23
|
%
|
|
3.55
|
%
|
|
Discount rate used to determine service cost
|
3.25
|
%
|
|
4.29
|
%
|
|
3.62
|
%
|
|
Discount rate used to determine interest cost
|
2.67
|
%
|
|
3.85
|
%
|
|
3.04
|
%
|
|
Initial health care cost trend rate
|
6.95
|
%
|
|
7.10
|
%
|
|
8.25
|
%
|
|
Ultimate health care cost trend rate
|
4.75
|
%
|
|
4.75
|
%
|
|
4.75
|
%
|
|
Year ultimate health care cost trend rate is achieved
|
2029
|
|
2028
|
|
2027
|
Employer Contributions to Retirement Benefits Plans
Contributions to pension plans that Eaton expects to make in 2021, and made in 2020, 2019 and 2018, follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
|
2020
|
|
2019
|
|
2018
|
|
United States plans
|
$
|
236
|
|
|
$
|
18
|
|
|
$
|
17
|
|
|
$
|
17
|
|
|
Non-United States plans
|
101
|
|
|
104
|
|
|
102
|
|
|
109
|
|
|
Total contributions
|
$
|
337
|
|
|
$
|
122
|
|
|
$
|
119
|
|
|
$
|
126
|
|
The following table provides the estimated pension and other postretirement benefit payments for each of the next five years, and the five years thereafter in the aggregate. For other postretirement benefits liabilities, the expected subsidy receipts related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 would reduce the gross payments listed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
United States
pension payments
|
|
Estimated
non-United States
pension payments
|
|
Estimated other postretirement
benefit payments
|
|
|
|
|
Gross
|
|
Medicare prescription
drug subsidy
|
|
2021
|
$
|
406
|
|
|
$
|
100
|
|
|
$
|
28
|
|
|
$
|
(1)
|
|
|
2022
|
298
|
|
|
101
|
|
|
31
|
|
|
—
|
|
|
2023
|
289
|
|
|
105
|
|
|
27
|
|
|
—
|
|
|
2024
|
280
|
|
|
107
|
|
|
26
|
|
|
—
|
|
|
2025
|
272
|
|
|
112
|
|
|
24
|
|
|
—
|
|
|
2026 - 2030
|
1,218
|
|
|
613
|
|
|
107
|
|
|
(1)
|
|
Pension Plan Assets
Investment policies and strategies are developed on a country specific basis. The United States plans, representing 62% of worldwide pension assets, and the United Kingdom plans representing 30% of worldwide pension assets, are invested primarily for growth, as the majority of the assets are in plans with active participants and ongoing accruals. In general, the plans have their primary allocation to diversified global equities, primarily through index funds in the form of common collective and other trusts. The United States plans' target allocation is 25% United States equities, 25% non-United States equities, 8% real estate (primarily equity of real estate investment trusts), 37% debt securities and 5% other, including private equity and cash equivalents. The United Kingdom plans' target asset allocations are 48% equities and the remainder in debt securities, cash equivalents and real estate investments. The equity risk for the plans is managed through broad geographic diversification and diversification across industries and levels of market capitalization. The majority of debt allocations for these plans are longer duration government and corporate debt. The United States, United Kingdom and Canada pension plans are authorized to use derivatives to achieve more economically desired market exposures and to use futures, swaps and options to gain or hedge exposures.
Fair Value Measurements
Financial instruments included in pension and other postretirement benefits plan assets are categorized into a fair value hierarchy of three levels, based on the degree of subjectivity inherent in the valuation methodology as follows:
Level 1 -Quoted prices (unadjusted) for identical assets in active markets.
Level 2 -Quoted prices for similar assets in active markets, and inputs that are observable for the asset, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 -Unobservable prices or inputs.
Certain investments that are measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables to permit a reconciliation to total plan assets.
Pension Plans
A summary of the fair value of pension plan assets at December 31, 2020 and 2019, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)1
|
|
2020
|
|
|
|
|
|
|
|
|
Common collective trusts
|
|
|
|
|
|
|
|
|
Non-United States equity and global equities
|
$
|
610
|
|
|
$
|
—
|
|
|
$
|
610
|
|
|
$
|
—
|
|
|
United States equity
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
|
Fixed income
|
681
|
|
|
—
|
|
|
681
|
|
|
—
|
|
|
Fixed income securities
|
1,021
|
|
|
—
|
|
|
1,021
|
|
|
—
|
|
|
United States treasuries
|
316
|
|
|
316
|
|
|
—
|
|
|
—
|
|
|
Bank loans
|
110
|
|
|
—
|
|
|
110
|
|
|
—
|
|
|
Real estate
|
419
|
|
|
221
|
|
|
14
|
|
|
184
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
184
|
|
|
71
|
|
|
113
|
|
|
—
|
|
|
Exchange traded funds
|
88
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
Other
|
213
|
|
|
—
|
|
|
39
|
|
|
174
|
|
|
Common collective and other trusts measured at net asset value
|
1,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds measured at net asset value
|
6
|
|
|
|
|
|
|
|
Pending purchases and sales of plan assets, and interest
receivable
|
(108)
|
|
|
|
|
|
|
|
|
Total pension plan assets
|
$
|
5,600
|
|
|
$
|
696
|
|
|
$
|
2,661
|
|
|
$
|
358
|
|
1 These pension plan assets include private real estate, private credit and private equity funds that generally have redemption notice periods of six months or longer, and are not eligible for redemption until the underlying assets are liquidated or distributed. The Company has unfunded commitments to these funds of approximately $254 at December 31, 2020, which will be satisfied by a reallocation of pension plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)1
|
|
2019
|
|
|
|
|
|
|
|
|
Common collective trusts
|
|
|
|
|
|
|
|
|
Non-United States equity and global equities
|
$
|
606
|
|
|
$
|
—
|
|
|
$
|
606
|
|
|
$
|
—
|
|
|
United States equity
|
74
|
|
|
—
|
|
|
74
|
|
|
—
|
|
|
Fixed income
|
571
|
|
|
—
|
|
|
571
|
|
|
—
|
|
|
Fixed income securities
|
885
|
|
|
—
|
|
|
885
|
|
|
—
|
|
|
United States treasuries
|
330
|
|
|
330
|
|
|
—
|
|
|
—
|
|
|
Bank loans
|
104
|
|
|
—
|
|
|
104
|
|
|
—
|
|
|
Real estate
|
299
|
|
|
225
|
|
|
13
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
196
|
|
|
67
|
|
|
129
|
|
|
—
|
|
|
Exchange traded funds
|
79
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
Other
|
167
|
|
|
—
|
|
|
38
|
|
|
129
|
|
|
Common collective and other trusts measured at net asset value
|
2,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds measured at net asset value
|
6
|
|
|
|
|
|
|
|
Pending purchases and sales of plan assets, and interest
receivable
|
(89)
|
|
|
|
|
|
|
|
|
Total pension plan assets
|
$
|
5,336
|
|
|
$
|
701
|
|
|
$
|
2,420
|
|
|
$
|
190
|
|
1 These pension plan assets include private real estate, private credit and private equity funds that generally have redemption notice periods of six months or longer, and are not eligible for redemption until the underlying assets are liquidated or distributed. The Company has unfunded commitments to these funds of approximately $334 at December 31, 2019, which will be satisfied by a reallocation of pension plan assets.
The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2019 and 2020 due to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate
|
|
|
|
Other
|
|
Total
|
|
Balance at January 1, 2019
|
$
|
21
|
|
|
|
|
$
|
75
|
|
|
$
|
96
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) relating to assets still held at year-end
|
4
|
|
|
|
|
12
|
|
|
16
|
|
|
Purchases, sales, settlements - net
|
36
|
|
|
|
|
42
|
|
|
78
|
|
|
Transfers into or out of Level 3
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
Balance at December 31, 2019
|
61
|
|
|
|
|
129
|
|
|
190
|
|
|
Actual return on plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) relating to assets still held at year-end
|
2
|
|
|
|
|
12
|
|
|
14
|
|
|
Purchases, sales, settlements - net
|
121
|
|
|
|
|
33
|
|
|
154
|
|
|
Transfers into or out of Level 3
|
—
|
|
|
|
|
—
|
|
|
—
|
|
|
Balance at December 31, 2020
|
$
|
184
|
|
|
|
|
$
|
174
|
|
|
$
|
358
|
|
Other Postretirement Benefits Plans
A summary of the fair value of other postretirement benefits plan assets at December 31, 2020 and 2019, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
2020
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common collective and other trusts measured at net asset value
|
17
|
|
|
|
|
|
|
|
|
Total other postretirement benefits plan assets
|
$
|
20
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common collective and other trusts measured at net asset value
|
18
|
|
|
|
|
|
|
|
|
Total other postretirement benefits plan assets
|
$
|
23
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Valuation Methodologies
Following is a description of the valuation methodologies used for pension and other postretirement benefits plan assets measured at fair value. There have been no changes in the methodologies used at December 31, 2020 and 2019.
Common collective and other trusts - Valued at the net unit value of units held by the trust at year end. The unit value is determined by the total value of fund assets divided by the total number of units of the fund owned. The equity investments in collective trusts are predominantly in index funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. The investments in other trusts are predominantly in exchange traded funds for which the underlying securities are actively traded in public markets based upon readily measurable prices. Common collective and other trusts measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Fixed income securities - These securities consist of publicly traded United States and non-United States fixed interest obligations (principally corporate and government bonds and debentures). The fair value of corporate and government debt securities is determined through third-party pricing models that consider various assumptions, including time value, yield curves, credit ratings, and current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.
United States treasuries - Valued at the closing price of each security.
Bank loans - These securities consist of senior secured term loans of publicly traded and privately held United States and non-United States floating rate obligations (principally corporations of non-investment grade rating). The fair value is determined through third-party pricing models that primarily utilize dealer quoted current market prices. The Company verifies the results of trustees or custodians and evaluates the pricing classification of these securities by performing analyses using other third-party sources.
Real estate - Consists of direct investments in the stock of publicly traded companies and investments in pooled funds that invest directly in real estate. The publicly traded companies are valued based on the closing price reported in an active market on which the individual securities are traded and as such are classified as Level 1. The pooled funds rely on appraisal-based valuations and as such are classified as Level 3.
Cash equivalents - Primarily certificates of deposit, commercial paper, and repurchase agreements.
Exchange traded funds - Valued at the closing price of the exchange traded fund's shares.
Money market funds - Money market funds measured at fair value using the net asset value per share practical expedient have not been categorized in the fair value hierarchy and are being presented in the tables above to permit a reconciliation of the fair value hierarchy to the total plan assets.
Other - Primarily insurance contracts for international plans and also futures contracts and over-the-counter options. These investments are valued based on the closing prices of future contracts or indices as available on Bloomberg or similar service, private credit and private equity investments.
For additional information regarding fair value measurements, see Note 14.
Defined Contribution Plans
The Company has various defined contribution benefit plans, primarily consisting of the plans in the United States. The total contributions related to these plans are charged to expense and were as follows:
|
|
|
|
|
|
|
|
2020
|
$
|
111
|
|
|
2019
|
130
|
|
|
2018
|
124
|
|
Note 10. COMMITMENTS AND CONTINGENCIES
Legal Contingencies
Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries, antitrust matters, and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims and proceedings. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.
In December 2011, Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) filed an action against (a) Cooper Industries, LLC, Cooper Industries, Ltd., Cooper Holdings, Ltd., Cooper US, Inc., and Cooper Industries plc (collectively, “Cooper”), (b) M&F Worldwide Corp., Mafco Worldwide Corp., Mafco Consolidated Group LLC, and PCT International Holdings, Inc. (collectively, “Mafco”), and (c) the Pneumo Abex Asbestos Claims Settlement Trust (the “Trust”) in Texas state court. Pepsi alleged that it was harmed by a 2011 settlement agreement (“2011 Settlement”) among Cooper, Mafco, and Pneumo Abex, LLC (“Pneumo,” which prior to the 2011 Settlement was a Mafco subsidiary), which settlement resolved litigation that Pneumo had previously brought against Cooper involving, among other things, a guaranty related to Pneumo’s friction products business. In November 2015, after a Texas court ruled that Pepsi's claims should be heard in arbitration, Pepsi filed a demand for arbitration against Cooper, Mafco, the Trust, and Pneumo. Pepsi subsequently dropped claims against all parties except Cooper. An arbitration under the auspices of the American Arbitration Association commenced in October 2017. Pepsi’s experts opined, among other things, that the value contributed to the Trust for a release of the guaranty was below reasonably equivalent value, and that an inability of Pneumo to satisfy future liabilities could result in plaintiffs suing Pepsi under various theories. Cooper submitted various expert reports and, among other things, Cooper’s experts opined that Pepsi had no basis to seek any damages and that Cooper paid reasonably equivalent value for the release of its indemnity obligations under the guaranty. The arbitration proceedings closed in December 2017. On July 11, 2018, the arbitration panel made certain findings and concluded that the value contributed to the Trust did not constitute reasonably equivalent value, but ordered the parties to recalculate the amount that should have been contributed to the Trust as of the date of the 2011 transaction. Based on the findings made by the panel and the recalculation ordered by the panel, Cooper believed that no additional amount should be contributed. Pepsi argued that an additional $347 should be contributed. Cooper and its expert disagreed with Pepsi’s argument and believed that Pepsi’s recalculation was flawed and failed to comply with the instructions of the panel. On August 23, 2018, the panel issued its final award and ordered Cooper to pay $293 to Pneumo Abex. On August 30, 2018, Pepsi sought to confirm the award in Texas state court, which Cooper opposed on October 9, 2018. Cooper further requested that the court vacate the award on various grounds, including that Cooper was prejudiced by the conduct of the proceedings, the panel exceeded its powers, and because the panel denied Cooper a full and fair opportunity to present certain evidence. The court confirmed the award at the confirmation hearing, which was held on October 12, 2018. On November 2, 2018, the Company appealed. On November 28, 2018, the Company paid $297, the full judgment plus accrued post-judgment interest, to Pneumo Abex and preserved its rights, including to appeal. On April 25, 2019, the appeal that Cooper filed was dismissed.
Environmental Contingencies
Eaton has established policies to ensure that its operations are conducted in keeping with good corporate citizenship and with a positive commitment to the protection of the natural and workplace environments. The Company requires that its manufacturing facilities be certified to ISO 14001, an international standard for environmental management systems. The Company routinely reviews EHS performance at each of its facilities and continuously strives to improve pollution prevention.
Eaton is involved in remedial response and voluntary environmental remediation at a number of sites, including certain of its currently-owned or formerly-owned plants. The Company has also been named a potentially responsible party under the United States federal Superfund law, or the state equivalents thereof, at a number of disposal sites. The Company became involved in these sites as a result of government action or in connection with business acquisitions. At the end of 2020, the Company was involved with a total of 114 sites worldwide, including the Superfund sites mentioned above, with none of these sites being individually significant to the Company.
Remediation activities, generally involving soil and/or groundwater contamination, include pre-cleanup activities such as fact finding and investigation, risk assessment, feasibility study, design and action planning, performance (where actions may range from monitoring, to removal of contaminants, to installation of longer-term remediation systems), and operation and maintenance of a remediation system. The extent of expected remediation activities and costs varies by site. A number of factors affect the cost of environmental remediation, including the number of parties involved at a particular site, the determination of the extent of contamination, the length of time the remediation may require, the complexity of environmental regulations, and the continuing advancement of remediation technology. Taking these factors into account, Eaton has estimated the costs of remediation, which will be paid over a period of years. The Company accrues an amount on an undiscounted basis, consistent with the estimates of these costs, when it is probable that a liability has been incurred. Actual results may differ from these estimates. At December 31, 2020 and 2019, the Company had an accrual totaling $103 and $104, respectively, for these costs.
Based upon Eaton's analysis and subject to the difficulty in estimating these future costs, the Company expects that any sum it may be required to pay in connection with environmental matters is not reasonably possible to exceed the recorded liability by an amount that would have a material effect on its financial position, results of operations or cash flows.
Warranty Accruals
Product warranty accruals are established at the time the related sale is recognized through a charge to Cost of products sold. Warranty accrual estimates are based primarily on historical warranty claim experience and specific customer contracts. Provisions for warranty accruals are comprised of basic warranties for products sold, as well as accruals for product recalls and other events when they are known and estimable. A summary of the current and long-term warranty accruals follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Balance at January 1
|
$
|
187
|
|
|
$
|
176
|
|
|
$
|
188
|
|
|
Provision
|
100
|
|
|
204
|
|
|
139
|
|
|
Settled
|
(130)
|
|
|
(175)
|
|
|
(145)
|
|
|
Other
|
2
|
|
|
(2)
|
|
|
(6)
|
|
|
Warranty accruals reclassified to held for sale
|
(8)
|
|
|
(16)
|
|
|
—
|
|
|
Balance at December 31
|
$
|
151
|
|
|
$
|
187
|
|
|
$
|
176
|
|
Note 11. INCOME TAXES
Eaton Corporation plc is domiciled in Ireland. Income (loss) before income taxes and income tax (benefit) expense are summarized below based on the geographic location of the operation to which such earnings and income taxes are attributable.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2020
|
|
2019
|
|
2018
|
|
Ireland
|
$
|
(132)
|
|
|
$
|
(201)
|
|
|
$
|
(365)
|
|
|
|
|
|
|
|
|
|
Foreign
|
1,878
|
|
|
2,792
|
|
|
2,789
|
|
|
Total income before income taxes
|
$
|
1,746
|
|
|
$
|
2,591
|
|
|
$
|
2,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
2020
|
|
2019
|
|
2018
|
|
Current
|
|
|
|
|
|
|
Ireland
|
$
|
15
|
|
|
$
|
26
|
|
|
$
|
47
|
|
|
Foreign
|
441
|
|
|
410
|
|
|
370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense
|
456
|
|
|
436
|
|
|
417
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
Ireland
|
—
|
|
|
3
|
|
|
6
|
|
|
Foreign
|
(125)
|
|
|
(61)
|
|
|
(145)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense (benefit)
|
(125)
|
|
|
(58)
|
|
|
(139)
|
|
|
Total income tax expense
|
$
|
331
|
|
|
$
|
378
|
|
|
$
|
278
|
|
Reconciliations of income taxes from the Ireland national statutory rate of 25% to the consolidated effective income tax rate follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Income taxes at the applicable statutory rate
|
25.0
|
%
|
|
25.0
|
%
|
|
25.0
|
%
|
|
|
|
|
|
|
|
|
Ireland operations
|
|
|
|
|
|
|
Ireland tax on trading income
|
(0.3)
|
%
|
|
(1.0)
|
%
|
|
(2.0)
|
%
|
|
Nondeductible interest expense
|
2.7
|
%
|
|
3.9
|
%
|
|
7.8
|
%
|
|
Ireland Other - net
|
0.4
|
%
|
|
0.1
|
%
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
Foreign operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible goodwill – sale of business
|
5.3
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax on foreign currency loss
|
—
|
%
|
|
—
|
%
|
|
(1.6)
|
%
|
|
|
|
|
|
|
|
Earnings taxed at other than
the applicable statutory tax rate
|
(16.0)
|
%
|
|
(14.8)
|
%
|
|
(19.6)
|
%
|
|
Other items
|
2.3
|
%
|
|
3.3
|
%
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Worldwide operations
|
|
|
|
|
|
|
Adjustments to tax liabilities
|
(0.6)
|
%
|
|
(0.5)
|
%
|
|
1.1
|
%
|
|
Adjustments to valuation allowances
|
0.2
|
%
|
|
(1.4)
|
%
|
|
(1.4)
|
%
|
|
Effective income tax expense rate
|
19.0
|
%
|
|
14.6
|
%
|
|
11.5
|
%
|
During 2020, income tax expense of $331 was recognized (an effective tax rate of 19.0%) compared to income tax expense of $378 in 2019 (an effective tax rate of 14.6%) and income tax expense of $278 in 2018 (an effective tax rate of 11.5%). The increase in the effective tax rate from 14.6% in 2019 to 19.0% in 2020 was primarily due to the tax expense on the gain from the sale of the Lighting business discussed in Note 2, partially offset by a tax benefit on the restructuring charges discussed in Note 16. The 2018 effective tax rate of 11.5% was lower than the 2019 effective tax rate of 14.6% primarily due to the tax impact of the 2018 arbitration decision expense discussed in Note 10.
With the exception of a $6 liability related to foreign subsidiaries considered as held for sale, no provision has been made for income taxes on undistributed earnings of foreign subsidiaries of approximately $28.9 billion at December 31, 2020, since it is the Company's intention to indefinitely reinvest undistributed earnings of its foreign subsidiaries. The Company expects to deploy capital to those markets which offer particularly attractive growth opportunities. The cash that is permanently reinvested is typically used to expand operations either organically or through acquisitions. It is not practicable to estimate the additional income taxes and applicable withholding taxes that would be payable on the remittance of such undistributed earnings.
Worldwide income tax payments, net of tax refunds, follow:
|
|
|
|
|
|
|
|
2020
|
$
|
391
|
|
|
2019
|
425
|
|
|
2018
|
379
|
|
Deferred Income Tax Assets and Liabilities
Components of noncurrent deferred income taxes follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
Noncurrent assets and liabilities
|
|
Noncurrent assets and liabilities
|
|
Accruals and other adjustments
|
|
|
|
|
Employee benefits
|
$
|
553
|
|
|
$
|
514
|
|
|
Depreciation and amortization
|
(1,101)
|
|
|
(1,245)
|
|
|
Other accruals and adjustments
|
505
|
|
|
498
|
|
|
|
|
|
|
|
Ireland income tax loss carryforwards
|
1
|
|
|
1
|
|
|
Foreign income tax loss carryforwards
|
1,815
|
|
|
1,826
|
|
|
Foreign income tax credit carryforwards
|
309
|
|
|
349
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for income tax loss and income tax
credit carryforwards
|
(1,863)
|
|
|
(1,914)
|
|
|
Other valuation allowances
|
(67)
|
|
|
(52)
|
|
|
Total deferred income taxes
|
152
|
|
|
(23)
|
|
|
Deferred income taxes reported as held for sale
|
3
|
|
|
1
|
|
|
Deferred income taxes
|
$
|
149
|
|
|
$
|
(24)
|
|
At December 31, 2020, Eaton Corporation plc and its foreign subsidiaries had income tax loss carryforwards and income tax credit carryforwards that are available to reduce future taxable income or tax liabilities. These carryforwards and their respective expiration dates are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
through
2025
|
|
2026
through
2030
|
|
2031
through
2035
|
|
2036
through
2045
|
|
|
|
Not
subject to
expiration
|
|
Valuation
allowance
|
|
Ireland income tax loss carryforwards
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
$
|
8
|
|
|
$
|
—
|
|
Ireland deferred income tax assets for income tax loss
carryforwards
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
1
|
|
|
(1)
|
|
|
Foreign income tax loss carryforwards
|
641
|
|
|
7,427
|
|
|
893
|
|
|
251
|
|
|
|
|
3,067
|
|
|
—
|
|
|
Foreign deferred income tax assets for income tax loss carryforwards
|
88
|
|
|
690
|
|
|
235
|
|
|
76
|
|
|
|
|
751
|
|
|
(1,655)
|
|
|
Foreign deferred income tax assets for income tax loss carryforwards after ASU 2013-11
|
76
|
|
|
686
|
|
|
226
|
|
|
76
|
|
|
|
|
751
|
|
|
(1,655)
|
|
|
Foreign income tax credit carryforwards
|
110
|
|
|
169
|
|
|
38
|
|
|
2
|
|
|
|
|
51
|
|
|
(207)
|
|
|
Foreign income tax credit carryforwards after ASU 2013-11
|
74
|
|
|
144
|
|
|
38
|
|
|
2
|
|
|
|
|
51
|
|
|
(207)
|
|
Recoverability of Deferred Income Tax Assets
Eaton is subject to the income tax laws in the jurisdictions in which it operates. In order to determine its income tax provision for financial statement purposes, Eaton must make significant estimates and judgments about its business operations in these jurisdictions. These estimates and judgments are also used in determining the deferred income tax assets and liabilities that have been recognized for differences between the financial statement and income tax basis of assets and liabilities, and income tax loss carryforwards and income tax credit carryforwards.
Management evaluates the realizability of deferred income tax assets for each of the jurisdictions in which it operates. If the Company experiences cumulative pre-tax income in a particular jurisdiction in the three-year period including the current and prior two years, management normally concludes that the deferred income tax assets will more likely than not be realizable and no valuation allowance is recognized, unless known or planned operating developments, or changes in tax laws, would lead management to conclude otherwise. However, if the Company experiences cumulative pre-tax losses in a particular jurisdiction in the three-year period including the current and prior two years, management then considers a series of factors in the determination of whether the deferred income tax assets can be realized. These factors include historical operating results, known or planned operating developments, the period of time over which certain temporary differences will reverse, consideration of the utilization of certain deferred income tax liabilities, tax law carryback capability in the particular country, prudent and feasible tax planning strategies, changes in tax laws, and estimates of future earnings and taxable income using the same assumptions as those used for the Company's goodwill and other impairment testing. After evaluation of these factors, if the deferred income tax assets are expected to be realized within the tax carryforward period allowed for that specific country, management would conclude that no valuation allowance would be required. To the extent that the deferred income tax assets exceed the amount that is expected to be realized within the tax carryforward period for a particular jurisdiction, management would establish a valuation allowance.
Applying the above methodology, valuation allowances have been established for certain deferred income tax assets to the extent they are not expected to be realized within the particular tax carryforward period.
Unrecognized Income Tax Benefits
A summary of gross unrecognized income tax benefits follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Balance at January 1
|
$
|
1,001
|
|
|
$
|
913
|
|
|
$
|
735
|
|
|
Increases and decreases as a result of positions taken during prior years
|
|
|
|
|
|
|
Transfers from valuation allowances
|
—
|
|
|
15
|
|
|
2
|
|
|
Other increases, including currency translation
|
10
|
|
|
22
|
|
|
164
|
|
|
Other decreases, including currency translation
|
(10)
|
|
|
(10)
|
|
|
(35)
|
|
|
Increases related to acquired businesses
|
7
|
|
|
—
|
|
|
—
|
|
|
Increases as a result of positions taken during the current year
|
58
|
|
|
80
|
|
|
69
|
|
|
Decreases relating to settlements with tax authorities
|
(26)
|
|
|
(16)
|
|
|
(3)
|
|
|
Decreases as a result of a lapse of the applicable statute of limitations
|
(4)
|
|
|
(3)
|
|
|
(19)
|
|
|
Balance at December 31
|
$
|
1,036
|
|
|
$
|
1,001
|
|
|
$
|
913
|
|
Eaton recognizes an income tax benefit from an uncertain tax position only if it is more likely than not that the benefit would be sustained upon examination by taxing authorities, based on the technical merits of the position. The Company evaluates and adjusts the amount of unrecognized income tax benefits based on changes in facts and circumstances. The Company does not enter into any of the United States Internal Revenue Service (IRS) Listed Transactions as set forth in Treasury Regulation 1.6011-4.
If all unrecognized income tax benefits were recognized, the net impact on the provision for income tax expense would be $681, which includes the impact of deferred tax netting pursuant to ASU 2013-11.
As of December 31, 2020 and 2019, Eaton had accrued approximately $110 and $93, respectively, for the payment of worldwide interest and penalties, which are not included in the table of unrecognized income tax benefits above. Eaton recognizes interest and penalties related to unrecognized income tax benefits in the provision for income tax expense.
The resolution of the majority of Eaton's unrecognized income tax benefits is dependent upon uncontrollable factors such as the prospect of retroactive regulations, new case law, and the willingness of the income tax authority to settle the issue, including the timing thereof. Therefore, for the majority of unrecognized income tax benefits, it is not reasonably possible to estimate the increase or decrease in the next 12 months. For each of the unrecognized income tax benefits where it is possible to estimate the increase or decrease in the balance within the next 12 months, the Company does not anticipate any significant change.
Eaton or its subsidiaries file income tax returns in Ireland and many countries around the world. With only a few exceptions, Irish and non-United States subsidiaries of Eaton are no longer subject to examinations for years before 2012.
The United States Internal Revenue Service (“IRS”) has completed its examination of the consolidated income tax returns of the Company’s United States subsidiaries (“Eaton US”) for 2005 through 2010 and has issued Statutory Notices of Deficiency (Notices) as discussed below. The statute of limitations on these tax years remains open until the matters are resolved. The IRS has also completed its examination of the consolidated income tax returns of Eaton US for 2011 through 2013 and has issued proposed adjustments as discussed below. The statute of limitations on these tax years remains open until December 31, 2021. The IRS is currently examining tax years 2014 through 2016. The statute of limitations for tax years 2014 through 2016 is open until December 31, 2021. Tax years 2017 through 2019 are still subject to examination by the IRS.
Eaton US is also under examination for the income tax filings in various states and localities of the United States. Income tax returns of states and localities within the United States will be reopened to the extent of United States federal income tax adjustments, if any, going back to 2005 when those audit years are finalized.
In 2011, the IRS issued a Notice for Eaton US for the 2005 and 2006 tax years (the 2011 Notice). The 2011 Notice proposed assessments of $75 in additional taxes plus $52 in penalties related primarily to transfer pricing adjustments for products manufactured in the Company's facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. Eaton US has set its transfer prices for products sold between these affiliates at the same prices that Eaton US sells such products to third parties as required by two successive Advance Pricing Agreements (APAs) Eaton US entered into with the IRS that governed the 2005-2010 tax years. Eaton US has continued to apply the arms-length transfer pricing methodology for 2011 through the current reporting period. Immediately prior to the 2011 Notice being issued, the IRS sent a letter stating that it was retrospectively canceling the APAs. Eaton US contested the proposed assessments in United States Tax Court. The case involved both whether the APAs should be enforced and, if not, the appropriate transfer pricing methodology. On July 26, 2017, the United States Tax Court issued a ruling in which it agreed with Eaton US that the IRS must abide by the terms of the APAs for the tax years 2005-2006. The Tax Court’s ruling on the APAs did not have a material impact on Eaton’s consolidated financial statements.
In 2014, Eaton US received a Notice from the IRS for the 2007 through 2010 tax years (the 2014 Notice) proposing assessments of $190 in additional taxes plus $72 in penalties, net of agreed credits and deductions, which the Company has also contested in Tax Court. The proposed assessments pertain primarily to the same transfer pricing issues and APA for which the Tax Court has issued its ruling during 2017 as noted above. The Company believes that the Tax Court’s ruling for tax years 2005-2006 will also be applicable to the 2007-2010 years. Following the issuance of the Tax Court’s ruling, Eaton and the IRS recognized that the ruling on the enforceability of the APAs did not address a secondary issue regarding the transfer pricing for a certain royalty paid from 2006-2010. Eaton US reported a consistent royalty rate for 2006-2010. The IRS has agreed to the royalty rate as reported by Eaton US in 2006. Although the IRS has not proposed an alternative rate, it has not agreed to apply the same royalty rate in the 2007-2010 years.
The 2014 Notice also includes a separate proposed assessment involving the recognition of income for several of Eaton US’s controlled foreign corporations. The Company believes that the proposed assessment is without merit and is contesting the matter in Tax Court. In October 2017, Eaton and the IRS both moved for partial summary judgment on this issue. On February 25, 2019 the Tax Court granted the IRS’s motion for partial summary judgment and denied Eaton’s. The Company intends to appeal the Tax Court’s partial summary judgment decision to the United States Sixth Circuit Court of Appeals. The Company believes that it will be successful on appeal and has not recorded any additional impact of the Tax Court's decision in its consolidated financial statements. The total potential impact of the Tax Court's partial summary judgment decision on the controlled foreign corporation income recognition issue is not estimable until all matters in the open tax years have been resolved.
In 2018 the IRS completed its examination of the Eaton US tax years 2011 through 2013 and has proposed adjustments to certain transfer pricing tax positions, including adjustments similar to those proposed in the 2011 and 2014 Notices for products manufactured in the Company’s facilities in Puerto Rico and the Dominican Republic and sold to affiliated companies located in the United States. The IRS also proposed adjustments involving the recognition of income for several of Eaton US’s controlled foreign corporation, which is the same issue included in the 2014 Notice described above and subject to litigation in Tax Court. The Company is pursuing its administrative appeals alternatives with respect to the IRS adjustments and believes that final resolution of the proposed adjustments will not have a material impact on its consolidated financial statements.
During 2010, the Company received a tax assessment, which included interest and penalties, in Brazil for the tax years 2005 through 2008 that relates to the amortization of certain goodwill generated from the acquisition of third-party businesses and corporate reorganizations. In 2018 the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $24 plus $67 of interest and penalties (translated at the December 31, 2020 exchange rate). During 2014, the Company received a tax assessment, which included interest and penalties, for the 2009 through 2012 tax years (primarily relating to the same issues concerning the 2005 through 2008 tax years). In November 2019, the Company received an unfavorable result at the final tax administrative appeals level, resulting in an alleged tax deficiency of $26 plus $91 of interest and penalties (translated at the December 31, 2020 exchange rate). The Company is challenging both of the assessments in the judicial system. Challenges in the judicial system are expected to take up to 10 years to resolve and require provision of certain assets as security for the alleged deficiencies. As of December 31, 2020, the Company pledged Brazilian real estate assets with net book value of $10 (translated at the December 31, 2020 exchange rate). During January 2021, the Company pledged additional Brazilian real estate assets with net book value of $5 and provided additional security in the form of a bond of $78 and cash deposit of $3 (translated at the December 31, 2020 exchange rate). The Company continues to believe that final resolution of both of the assessments will not have a material impact on its consolidated financial statements.
Note 12. EATON SHAREHOLDERS' EQUITY
There are 750 million Eaton ordinary shares authorized ($0.01 par value per share), 398.1 million and 413.3 million of which were issued and outstanding at December 31, 2020 and 2019, respectively. Eaton's Memorandum and Articles of Association authorized 40 thousand deferred ordinary shares (€1.00 par value per share) and 10 thousand preferred A shares ($1.00 par value per share), all of which were issued and outstanding at December 31, 2020 and 2019, and 10 million serial preferred shares ($0.01 par value per share), none of which is outstanding at December 31, 2020 and 2019. At December 31, 2020, there were 11,390 holders of record of Eaton ordinary shares. Additionally, 16,400 current and former employees were shareholders through participation in the Eaton Savings Plan, the Eaton Personal Investment Plan, or the Eaton Puerto Rico Retirement Savings Plan.
On February 27, 2019, the Board of Directors adopted a new share repurchase program for share repurchases up to $5,000 of ordinary shares (2019 Program). Under the 2019 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 2020 and 2019, 17.1 million and 12.5 million ordinary shares, respectively, were repurchased under the 2019 Program in the open market at a total cost of $1,608 and $1,000, respectively.
Eaton has deferral plans that permit certain employees and directors to defer a portion of their compensation. A trust contains $3 and $5 of ordinary shares and marketable securities at December 31, 2020 and 2019, respectively, to fund a portion of these liabilities. The marketable securities were included in Other assets and the ordinary shares were included in Shareholders' equity at historical cost.
On February 24, 2021, Eaton's Board of Directors declared a quarterly dividend of $0.76 per ordinary share, a 4% increase over the dividend paid in the fourth quarter of 2020. The dividend is payable on March 30, 2021 to shareholders of record on March 16, 2021.
Comprehensive Income (Loss)
Comprehensive income (loss) consists primarily of net income, currency translation and related hedging instruments, changes in unrecognized costs of pension and other postretirement benefits, and changes in the effective portion of open derivative contracts designated as cash flow hedges. The following table summarizes the pre-tax and after-tax amounts recognized in Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Pre-tax
|
|
After-tax
|
|
Pre-tax
|
|
After-tax
|
|
Pre-tax
|
|
After-tax
|
|
Currency translation and related hedging instruments
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from currency translation and related hedging
instruments
|
$
|
154
|
|
|
$
|
164
|
|
|
$
|
15
|
|
|
$
|
16
|
|
|
$
|
(613)
|
|
|
$
|
(609)
|
|
|
Translation reclassified to earnings
|
37
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
191
|
|
|
201
|
|
|
15
|
|
|
16
|
|
|
(613)
|
|
|
(609)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pensions and other postretirement benefits
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit (cost) arising during the year
|
(1)
|
|
|
(1)
|
|
|
(2)
|
|
|
(2)
|
|
|
(25)
|
|
|
(20)
|
|
|
Net gain (loss) arising during the year
|
(263)
|
|
|
(203)
|
|
|
(294)
|
|
|
(232)
|
|
|
(358)
|
|
|
(274)
|
|
|
Currency translation
|
(48)
|
|
|
(37)
|
|
|
(16)
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|
|
(13)
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|
|
37
|
|
|
29
|
|
|
Other
|
(2)
|
|
|
(1)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Amortization of actuarial loss and prior service cost
reclassified to earnings
|
221
|
|
|
169
|
|
|
148
|
|
|
117
|
|
|
168
|
|
|
121
|
|
|
|
(93)
|
|
|
(73)
|
|
|
(164)
|
|
|
(130)
|
|
|
(178)
|
|
|
(139)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives designated as cash flow hedges
|
(60)
|
|
|
(47)
|
|
|
(33)
|
|
|
(27)
|
|
|
(8)
|
|
|
(6)
|
|
|
Changes in cash flow hedges reclassified to earnings
|
17
|
|
|
14
|
|
|
(5)
|
|
|
(4)
|
|
|
16
|
|
|
13
|
|
|
Cash flow hedges, net of reclassification adjustments
|
(43)
|
|
|
(33)
|
|
|
(38)
|
|
|
(31)
|
|
|
8
|
|
|
7
|
|
|
Other comprehensive income (loss) attributable to Eaton ordinary shareholders
|
$
|
55
|
|
|
$
|
95
|
|
|
$
|
(187)
|
|
|
$
|
(145)
|
|
|
$
|
(783)
|
|
|
$
|
(741)
|
|
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 January 1, 2020
|
$
|
(2,848)
|
|
|
$
|
(1,408)
|
|
|
$
|
(34)
|
|
|
$
|
(4,290)
|
|
Other comprehensive income (loss) before
reclassifications
|
164
|
|
|
(242)
|
|
|
(47)
|
|
|
(125)
|
|
Amounts reclassified from Accumulated other
comprehensive loss (income)
|
37
|
|
|
169
|
|
|
14
|
|
|
220
|
|
Net current-period Other comprehensive
income (loss)
|
201
|
|
|
(73)
|
|
|
(33)
|
|
|
95
|
|
|
Balance at December 31, 2020
|
$
|
(2,647)
|
|
|
$
|
(1,481)
|
|
|
$
|
(67)
|
|
|
$
|
(4,195)
|
|
The reclassifications out of Accumulated other comprehensive loss follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
Consolidated Statements of
Income classification
|
|
Currency translation losses
|
|
|
|
|
|
Sale of business
|
|
$
|
(37)
|
|
|
Gain on sale of business
|
|
Tax benefit
|
|
—
|
|
|
|
|
Total, net of tax
|
|
(37)
|
|
|
|
|
|
|
|
|
|
Amortization of defined benefits pension and other
postretirement benefits items
|
|
|
|
|
|
Actuarial loss and prior service cost
|
|
(221)
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax benefit
|
|
52
|
|
|
|
|
Total, net of tax
|
|
(169)
|
|
|
|
|
|
|
|
|
|
|
Gains and (losses) on cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
|
(18)
|
|
|
Net sales and Cost of products sold
|
|
Commodity contracts
|
|
1
|
|
|
Cost of products sold
|
|
|
|
|
|
|
|
Tax benefit
|
|
3
|
|
|
|
|
Total, net of tax
|
|
(14)
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications for the period
|
|
$
|
(220)
|
|
|
|
1 These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 9 for additional information about defined benefits pension and other postretirement benefits items.
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Shares in millions)
|
2020
|
|
2019
|
|
2018
|
|
Net income attributable to Eaton ordinary shareholders
|
$
|
1,410
|
|
|
$
|
2,211
|
|
|
$
|
2,145
|
|
|
|
|
|
|
|
|
|
Weighted-average number of ordinary shares outstanding - diluted
|
404.0
|
|
|
420.8
|
|
|
436.9
|
|
|
Less dilutive effect of equity-based compensation
|
1.8
|
|
|
1.8
|
|
|
2.6
|
|
|
Weighted-average number of ordinary shares outstanding - basic
|
402.2
|
|
|
419.0
|
|
|
434.3
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Eaton ordinary shareholders
|
|
|
|
|
|
|
Diluted
|
$
|
3.49
|
|
|
$
|
5.25
|
|
|
$
|
4.91
|
|
|
Basic
|
3.51
|
|
|
5.28
|
|
|
4.93
|
|
In 2020, 2019, and 2018, 0.6 million, 0.8 million, and 0.5 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive.
Note 13. EQUITY-BASED COMPENSATION
Eaton recognizes equity-based compensation expense based on the grant date fair value of the award. Awards with service conditions or both service and market conditions are expensed over the period during which an employee is required to provide service in exchange for the award. Awards with both service and performance conditions are expensed over the period an employee is required to provide service based on the number of units for which achievement of the performance objective is probable. The Company estimates forfeitures as part of recording equity-based compensation expense.
Restricted Stock Units and Awards
Restricted stock units (RSUs) and restricted stock awards (RSAs) have been issued to certain employees and directors. The fair value of RSUs and RSAs are determined based on the closing market price of the Company’s ordinary shares at the date of grant. The RSUs entitle the holder to receive one ordinary share for each RSU upon vesting, generally over three years. RSAs are issued and outstanding at the time of grant, but remain subject to forfeiture until vested, generally over ten years. A summary of the RSU and RSA activity for 2020 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restricted stock units and awards in millions)
|
Number of restricted
stock units and awards
|
|
Weighted-average fair
value per unit and award
|
|
Non-vested at January 1
|
1.7
|
|
|
$
|
76.79
|
|
|
Granted
|
0.7
|
|
|
97.75
|
|
|
Vested
|
(0.8)
|
|
|
78.58
|
|
|
Forfeited
|
(0.1)
|
|
|
85.21
|
|
|
Non-vested at December 31
|
1.5
|
|
|
$
|
85.09
|
|
Information related to RSUs and RSAs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Pre-tax expense for RSUs and RSAs
|
$
|
58
|
|
|
$
|
57
|
|
|
$
|
59
|
|
|
After-tax expense for RSUs and RSAs
|
46
|
|
|
45
|
|
|
46
|
|
|
Fair value of vested RSUs and RSAs
|
75
|
|
|
103
|
|
|
71
|
|
As of December 31, 2020, total compensation expense not yet recognized related to non-vested RSUs and RSAs was $73, and the weighted-average period in which the expense is expected to be recognized is 2.1 years. Excess tax benefit for RSUs and RSAs totaled $2, $3 and $3 for 2020, 2019, and 2018, respectively.
Performance Share Units
Performance share units (PSUs) have been issued to certain employees that vest based on the satisfaction of a three-year service period and total shareholder return relative to that of a group of peers. Awards earned at the end of the three-year vesting period range from 0% to 200% of the targeted number of PSUs granted based on the ranking of total shareholder return of the Company, assuming reinvestment of all dividends, relative to a defined peer group of companies. Equity-based compensation expense for these PSUs is recognized over the period during which an employee is required to provide service in exchange for the award. Upon vesting, dividends that have accumulated during the vesting period are paid on earned awards.
The Company uses a Monte Carlo simulation to estimate the fair value of PSUs with market conditions. The principal assumptions utilized in valuing these PSUs include the expected stock price volatility (based on the most recent 3-year period as of the grant date) and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon bonds with a three-year maturity as of the grant date). A summary of the assumptions used in determining fair value of these PSUs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Expected volatility
|
|
21
|
%
|
|
21
|
%
|
|
22
|
%
|
|
Risk-free interest rate
|
|
1.16
|
%
|
|
2.42
|
%
|
|
2.38
|
%
|
|
Weighted-average fair value of PSUs granted
|
|
$
|
121.01
|
|
|
$
|
92.50
|
|
|
$
|
100.86
|
|
A summary of these PSUs that vested follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Performance share units in millions)
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
Percent payout
|
|
178
|
%
|
|
130
|
%
|
|
116
|
%
|
|
|
|
Shares vested
|
|
0.4
|
|
|
0.3
|
|
|
0.5
|
|
|
|
A summary of the 2020 activity for these PSUs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Performance share units in millions)
|
|
Number of performance
share units
|
|
Weighted-average fair
value per unit
|
|
Non-vested at January 1
|
|
0.6
|
|
|
$
|
96.14
|
|
|
Granted1
|
|
0.2
|
|
|
121.01
|
|
|
Adjusted for performance results achieved2
|
|
0.2
|
|
|
100.86
|
|
|
Vested
|
|
(0.4)
|
|
|
100.86
|
|
|
Forfeited
|
|
(0.1)
|
|
|
101.56
|
|
|
Non-vested at December 31
|
|
0.5
|
|
|
$
|
105.47
|
|
1 Performance shares granted assuming the Company will perform at target relative to peers.
2 Adjustments for the number of shares vested under the 2018 awards at the end of the three-year performance period ended December 31, 2020, being higher than the target number of shares.
Information related to PSUs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Pre-tax expense for PSUs
|
|
$
|
25
|
|
|
$
|
21
|
|
|
$
|
28
|
|
|
After-tax expense for PSUs
|
|
20
|
|
|
17
|
|
|
22
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020, total compensation expense not yet recognized related to non-vested PSUs was $31 and the weighted-average period in which the expense is to be recognized is 1.7 years. Excess tax benefit for PSUs totaled $3 and $1 in 2020 and 2019, respectively, and there was no excess tax benefit for PSUs in 2018.
Stock Options
Under various plans, stock options have been granted to certain employees and directors to purchase ordinary shares at prices equal to fair market value on the date of grant. Substantially all of these options vest ratably during the three-year period following the date of grant and expire 10 years from the date of grant. Compensation expense is recognized for stock options based on the fair value of the options at the date of grant and amortized on a straight-line basis over the period the employee or director is required to provide service.
The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). A summary of the assumptions used in determining the fair value of stock options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Expected volatility
|
24
|
%
|
|
23
|
%
|
|
26
|
%
|
|
Expected option life in years
|
6.6
|
|
6.6
|
|
6.7
|
|
Expected dividend yield
|
3.2
|
%
|
|
3.2
|
%
|
|
3.0
|
%
|
|
Risk-free interest rate
|
0.5 to 1.5%
|
|
1.9 to 2.6%
|
|
2.6 to 2.9%
|
|
Weighted-average fair value of stock options granted
|
$
|
15.55
|
|
|
$
|
14.08
|
|
|
$
|
16.93
|
|
A summary of stock option activity follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Options in millions)
|
Weighted-average
exercise price per option
|
|
Options
|
|
Weighted-average
remaining
contractual life
in years
|
|
Aggregate
intrinsic
value
|
|
Outstanding at January 1, 2020
|
$
|
69.95
|
|
|
4.1
|
|
|
|
|
|
|
Granted
|
98.16
|
|
|
0.7
|
|
|
|
|
|
|
Exercised
|
63.49
|
|
|
(1.1)
|
|
|
|
|
|
|
Forfeited and canceled
|
83.42
|
|
|
(0.1)
|
|
|
|
|
|
|
Outstanding at December 31, 2020
|
$
|
76.93
|
|
|
3.6
|
|
|
6.4
|
|
$
|
156.6
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2020
|
$
|
70.02
|
|
|
2.4
|
|
|
5.3
|
|
$
|
117.9
|
|
|
Reserved for future grants at December 31, 2020
|
|
|
24.8
|
|
|
|
|
|
The aggregate intrinsic value in the table above represents the total excess of the $120.14 closing price of Eaton ordinary shares on the last trading day of 2020 over the exercise price of the stock option, multiplied by the related number of options outstanding and exercisable. The aggregate intrinsic value is not recognized for financial accounting purposes and the value changes based on the daily changes in the fair market value of the Company's ordinary shares.
Information related to stock options follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Pre-tax expense for stock options
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
After-tax expense for stock options
|
7
|
|
|
7
|
|
|
9
|
|
|
Proceeds from stock options exercised
|
70
|
|
|
67
|
|
|
29
|
|
|
Income tax benefit related to stock options exercised
|
|
|
|
|
|
Tax benefit classified in operating activities in the Consolidated
Statements of Cash Flows
|
10
|
|
|
4
|
|
|
3
|
|
|
Intrinsic value of stock options exercised
|
50
|
|
|
29
|
|
|
17
|
|
|
Total fair value of stock options vested
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
Stock options exercised, in millions of options
|
1.1
|
|
|
1.2
|
|
|
0.6
|
|
As of December 31, 2020, total compensation expense not yet recognized related to non-vested stock options was $10, and the weighted-average period in which the expense is expected to be recognized is 1.8 years.
Note 14. FAIR VALUE MEASUREMENTS
Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
|
Other
observable
inputs
(Level 2)
|
|
Unobservable
inputs
(Level 3)
|
|
2020
|
|
|
|
|
|
|
|
|
Cash
|
$
|
438
|
|
|
$
|
438
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments
|
664
|
|
|
664
|
|
|
—
|
|
|
—
|
|
|
Net derivative contracts
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash
|
$
|
370
|
|
|
$
|
370
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Short-term investments
|
221
|
|
|
221
|
|
|
—
|
|
|
—
|
|
|
Net derivative contracts
|
53
|
|
|
—
|
|
|
53
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were measured using unobservable inputs.
Other Fair Value Measurements
Long-term debt and the current portion of long-term debt had a carrying value of $8,057 and fair value of $9,075 at December 31, 2020 compared to $8,067 and $8,638, respectively, at December 31, 2019. The fair value of Eaton's debt instruments was estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities and is considered a Level 2 fair value measurement.
Short-Term Investments
Eaton invests excess cash generated from operations in short-term marketable investments. A summary of the carrying value, which approximates the fair value due to the short-term maturities of these investments, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Time deposits and certificates of deposit with banks
|
$
|
168
|
|
|
$
|
150
|
|
|
Money market investments
|
496
|
|
|
71
|
|
|
|
|
|
|
|
Total short-term investments
|
$
|
664
|
|
|
$
|
221
|
|
Note 15. 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 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 $2,020 and $1,845 at December 31, 2020 and 2019, respectively. See Note 8 for additional information about debt.
Interest Rate Risk
Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk of certain long-term debt. These interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt in Note 8. Eaton also entered into several forward starting floating-to-fixed interest rate swaps to manage interest rate risk on a future anticipated debt issuance.
A summary of interest rate swaps outstanding at December 31, 2020, follows:
Fixed-to-Floating Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
Fixed interest
rate received
|
|
Floating interest
rate paid
|
|
Basis for contracted floating interest rate paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
275
|
|
|
3.47%
|
|
2.25%
|
|
1 month LIBOR + 1.74%
|
|
100
|
|
|
8.10%
|
|
6.42%
|
|
1 month LIBOR + 5.90%
|
|
1,400
|
|
|
2.75%
|
|
1.20%
|
|
1 month LIBOR + 0.58%
|
|
200
|
|
|
3.68%
|
|
1.58%
|
|
1 month LIBOR + 1.07%
|
|
25
|
|
|
7.63%
|
|
3.16%
|
|
6 month LIBOR + 2.48%
|
|
50
|
|
|
7.65%
|
|
3.03%
|
|
6 month LIBOR + 2.57%
|
|
25
|
|
|
5.45%
|
|
1.02%
|
|
6 month LIBOR + 0.28%
|
Forward Starting Floating-to-Fixed Interest Rate Swaps
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount
|
|
Floating interest
rate to be received
|
|
Fixed interest
rate to be paid
|
|
Basis for contracted floating interest rate received
|
|
$
|
50
|
|
|
—%
|
|
3.10%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
3.06%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.80%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.81%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.64%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.64%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.30%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
2.08%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.77%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.51%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.50%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.20%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.14%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
0.81%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.24%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
1.31%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
0.71%
|
|
3 month LIBOR + 0.00%
|
|
50
|
|
|
—%
|
|
0.78%
|
|
3 month LIBOR + 0.00%
|
Derivative Financial Statement Impacts
The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional
amount
|
|
Other
current
assets
|
|
Other
noncurrent
assets
|
|
Other
current
liabilities
|
|
Other
noncurrent
liabilities
|
|
Type of
hedge
|
|
Term
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps
|
$
|
2,075
|
|
|
$
|
2
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fair value
|
|
6 months to
14 years
|
|
Forward starting floating-to-fixed interest rate swaps
|
900
|
|
|
—
|
|
|
17
|
|
|
—
|
|
|
108
|
|
|
Cash flow
|
|
12 to 32 years
|
|
Currency exchange contracts
|
946
|
|
|
20
|
|
|
6
|
|
|
20
|
|
|
1
|
|
|
Cash flow
|
|
1 to 36 months
|
|
Commodity contracts
|
24
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash flow
|
|
1 to 12 months
|
|
Total
|
|
|
$
|
26
|
|
|
$
|
123
|
|
|
$
|
20
|
|
|
$
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
$
|
5,227
|
|
|
$
|
43
|
|
|
|
|
$
|
34
|
|
|
|
|
|
|
1 to 12 months
|
|
Commodity contracts
|
18
|
|
|
2
|
|
|
|
|
—
|
|
|
|
|
|
|
1 month
|
|
Total
|
|
|
$
|
45
|
|
|
|
|
$
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps
|
$
|
2,225
|
|
|
$
|
—
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Fair value
|
|
12 months to
15 years
|
|
Forward starting floating-to-fixed interest rate swaps
|
500
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
42
|
|
|
Cash flow
|
|
13 to 33 years
|
|
Currency exchange contracts
|
1,146
|
|
|
14
|
|
|
3
|
|
|
11
|
|
|
6
|
|
|
Cash flow
|
|
1 to 36 months
|
|
Commodity contracts
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Cash flow
|
|
1 to 9 months
|
|
Total
|
|
|
$
|
14
|
|
|
$
|
63
|
|
|
$
|
11
|
|
|
$
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
$
|
4,975
|
|
|
$
|
48
|
|
|
|
|
$
|
13
|
|
|
|
|
|
|
1 to 12 months
|
|
Commodity contracts
|
3
|
|
|
—
|
|
|
|
|
—
|
|
|
|
|
|
|
1 month
|
|
Total
|
|
|
$
|
48
|
|
|
|
|
$
|
13
|
|
|
|
|
|
|
|
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 Consolidated Statement of Cash Flows.
As of December 31, 2020, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
|
|
December 31, 2020
|
|
|
|
Term
|
|
Copper
|
|
7
|
|
|
millions of pounds
|
|
1 to 12 months
|
|
Gold
|
|
1,474
|
|
|
Troy ounces
|
|
1 to 12 months
|
The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Sheets
|
December 31, 2020
|
|
|
December 31, 2019
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
Long-term debt
|
$
|
(2,688)
|
|
|
|
$
|
(2,838)
|
|
|
$
|
(139)
|
|
|
$
|
(97)
|
|
|
(a) At December 31, 2020 and 2019, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $37 and $40, respectively.
The impact of hedging activities to the Consolidated Statements of Income are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
|
Net Sales
|
|
Cost of products sold
|
|
Interest expense - net
|
|
|
|
Amounts from Consolidated Statements of Income
|
$
|
17,858
|
|
|
$
|
12,408
|
|
|
$
|
149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
|
|
|
|
|
|
|
|
Hedged item
|
$
|
13
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
|
|
Derivative designated as hedging instrument
|
(13)
|
|
|
(5)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(45)
|
|
|
|
|
Derivative designated as hedging instrument
|
—
|
|
|
—
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
|
|
Net Sales
|
|
Cost of products sold
|
|
Interest expense - net
|
|
|
|
Amounts from Consolidated Statements of Income
|
$
|
21,390
|
|
|
$
|
14,338
|
|
|
$
|
199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
|
|
|
|
|
|
|
|
Hedged item
|
$
|
7
|
|
|
$
|
(12)
|
|
|
$
|
—
|
|
|
|
|
Derivative designated as hedging instrument
|
(7)
|
|
|
12
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity contracts
|
|
|
|
|
|
|
|
|
Hedged item
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
Derivative designated as hedging instrument
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on derivatives designated as fair value hedges
|
|
|
|
|
|
|
|
|
Fixed-to-floating interest rate swaps
|
|
|
|
|
|
|
|
|
Hedged item
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(62)
|
|
|
|
|
Derivative designated as hedging instrument
|
—
|
|
|
—
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of derivatives not designated as hedges to the Consolidated Statements of Income are as follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) recognized in Consolidated Statements of Income
|
|
|
|
Consolidated Statements of Income classification
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Gain (loss) on derivatives not designated as hedges
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
$
|
72
|
|
|
$
|
73
|
|
|
|
|
Interest expense - net
|
|
Commodity Contracts
|
4
|
|
|
—
|
|
|
|
|
Cost of products sold
|
|
Total
|
$
|
76
|
|
|
$
|
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements 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
|
|
|
2020
|
|
2019
|
|
|
|
2020
|
|
2019
|
|
Derivatives designated as cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Forward starting floating-to-fixed interest rate swaps
|
$
|
(52)
|
|
|
$
|
(36)
|
|
|
Interest expense - net
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency exchange contracts
|
(13)
|
|
|
3
|
|
|
Net sales and Cost of products sold
|
|
(18)
|
|
|
5
|
|
|
Commodity contracts
|
5
|
|
|
—
|
|
|
Cost of products sold
|
|
1
|
|
|
—
|
|
Non-derivative designated as net
investment hedges
|
|
|
|
|
|
|
|
|
|
|
Foreign currency denominated debt
|
(173)
|
|
|
15
|
|
|
Interest expense - net
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
(233)
|
|
|
$
|
(18)
|
|
|
|
|
$
|
(17)
|
|
|
$
|
5
|
|
At December 31, 2020, a gain of $4 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.
Note 16. RESTRUCTURING CHARGES
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions. Restructuring charges incurred under this program were $214 in 2020. These restructuring activities are expected to incur additional expenses of $61 and $5 in 2021 and 2022, respectively, primarily comprised of plant closing and other costs, resulting in total estimated charges of $280 for the entire program.
A summary of restructuring program charges follows:
|
|
|
|
|
|
|
|
|
2020
|
|
Workforce reductions
|
$
|
172
|
|
|
Plant closing and other
|
42
|
|
|
Total before income taxes
|
214
|
|
|
Income tax benefit
|
44
|
|
|
Total after income taxes
|
$
|
170
|
|
|
Per ordinary share - diluted
|
$
|
0.42
|
|
Restructuring program charges related to the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
Electrical Americas
|
|
|
$
|
18
|
|
|
|
|
|
|
Electrical Global
|
|
|
55
|
|
|
|
|
|
|
Aerospace
|
|
|
34
|
|
|
|
|
|
|
Vehicle
|
|
|
102
|
|
|
|
|
|
|
eMobility
|
|
|
1
|
|
|
|
|
|
|
Corporate
|
|
|
4
|
|
|
|
|
|
|
Total
|
|
|
$
|
214
|
|
|
|
|
|
A summary of liabilities related to workforce reductions, plant closing and other associated costs follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workforce reductions
|
|
Plant closing and other
|
|
Total
|
|
Balance at January 1, 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Liability recognized
|
172
|
|
|
42
|
|
|
214
|
|
|
Payments, utilization and translation
|
(33)
|
|
|
(39)
|
|
|
(72)
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
139
|
|
|
$
|
3
|
|
|
$
|
142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
These restructuring program charges were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense - net, as appropriate. In Business Segment Information, these restructuring program charges are treated as Corporate items. See Note 17 for additional information about business segments.
Note 17. BUSINESS SEGMENT AND GEOGRAPHIC REGION 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 segments are as follows:
Electrical Americas and Electrical Global
The Electrical Americas segment consists of electrical components, industrial components, power distribution and assemblies, residential products, single and three phase power quality, wiring devices, circuit protection, utility power distribution, power reliability equipment, and services that are primarily produced and sold in North and America. The Electrical Global segment consists of electrical components, industrial components, power distribution and assemblies, single phase and three phase power quality, and services that are primarily produced and sold outside of North and South America; as well as hazardous duty electrical equipment, emergency lighting, fire detection, intrinsically safe explosion-proof instrumentation, and structural support systems that are produced and sold globally. The principal markets for these segments are industrial, institutional, governmental, utility, commercial, residential and information technology. These products are used wherever there is a demand for electrical power in commercial buildings, data centers, residences, apartment and office buildings, hospitals, factories, utilities, and industrial and energy facilities. The segments share certain common global customers, but a large number of customers are located regionally. Sales are made through distributors, resellers, and manufacturers' representatives, as well as directly to original equipment manufacturers, utilities, and certain other end users.
Hydraulics
The Hydraulics segment is a global leader in hydraulics components, systems and services for industrial and mobile equipment. Eaton offers a wide range of power products including pumps, motors and hydraulic power units; a broad range of controls and sensing products including valves, cylinders and electronic controls; a full range of fluid conveyance products including industrial and hydraulic hose, fittings, and assemblies, thermoplastic hose and tubing, couplings, connectors, and assembly equipment; industrial drum and disc brakes. The principal markets for the Hydraulics segment include renewable energy, marine, agriculture, oil and gas, construction, mining, forestry, utility, material handling, truck and bus, machine tools, molding, primary metals, and power generation. Key manufacturing customers in these markets and other customers are located globally. Products are sold and serviced through a variety of channels.
Aerospace
The Aerospace segment is a leading global supplier of aerospace fuel, hydraulics, and pneumatic systems for commercial and military use, as well as filtration systems for industrial applications. Products include hydraulic power generation systems for aerospace applications including pumps, motors, hydraulic power units, hose and fittings, electro-hydraulic pumps; controls and sensing products including valves, cylinders, electronic controls, electromechanical actuators, sensors, aircraft flap and slat systems and nose wheel steering systems; fluid conveyance products, including hose, thermoplastic tubing, fittings, adapters, couplings, sealing and ducting; fuel systems including fuel pumps, sensors, valves, adapters and regulators; high performance interconnect products including wiring connectors and cables. The Aerospace segment also includes filtration systems including hydraulic filters, bag filters, strainers and cartridges; and golf grips. The principal markets for the Aerospace segment are manufacturers of commercial and military aircraft and related after-market customers, as well as industrial applications. These manufacturers and other customers operate globally. Products are sold and serviced through a variety of channels.
Vehicle
The Vehicle segment is a leader in the design, manufacture, marketing, and supply of: drivetrain, powertrain systems and critical components that reduce emissions and improve fuel economy, stability, performance, and safety of cars, light trucks, and commercial vehicles. Products include transmissions, clutches, hybrid power systems, superchargers, engine valves and valve actuation systems, cylinder heads, locking and limited slip differentials, transmission controls, and fuel vapor components for the global vehicle industry. The principal markets for the Vehicle segment are original equipment manufacturers and aftermarket customers of heavy-, medium-, and light-duty trucks, SUVs, CUVs, passenger cars and agricultural equipment.
eMobility
The eMobility segment designs, manufactures, markets, and supplies electrical and electronic components and systems that improve the power management and performance of both on-road and off-road vehicles. Products include high voltage inverters, converters, fuses, onboard chargers, circuit protection units, vehicle controls, power distribution, fuel tank isolation valves, and commercial vehicle hybrid systems. The principle markets for the eMobility segment are original equipment manufacturers and aftermarket customers of passenger cars, commercial vehicles, and construction, agriculture, and mining equipment.
Other Information
No single customer represented greater than 10% of net sales in 2020, 2019 or 2018, respectively.
The accounting policies of the business segments are generally the same as the policies described in Note 1, except that operating profit only reflects the service cost component and the cost of any special termination benefits related to pensions and other postretirement benefits. Intersegment sales and transfers are accounted for at the same prices as if the sales and transfers were made to third parties. These intersegment sales are eliminated in consolidation. Operating profit includes the operating profit from intersegment sales.
For purposes of business segment performance measurement, the Company does not allocate items that are of a non-operating nature or are of a corporate or functional governance nature. Corporate expenses consist of all the Company's costs associated with acquisitions, divestitures, and gains and losses on the sale of certain businesses, restructuring program costs (Note 16) and corporate office expenses including compensation, benefits, occupancy, depreciation, and other administrative costs. Identifiable assets of the business segments exclude goodwill, other intangible assets, and general corporate assets, which principally consist of certain cash, short-term investments, deferred income taxes, certain accounts receivable, certain property, plant and equipment, and certain other assets.
Business Segment Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales
|
|
|
|
|
|
|
Electrical Americas
|
$
|
6,680
|
|
|
$
|
8,175
|
|
|
$
|
7,914
|
|
|
Electrical Global
|
4,703
|
|
|
5,172
|
|
|
5,159
|
|
|
Hydraulics
|
1,842
|
|
|
2,204
|
|
|
2,392
|
|
|
Aerospace
|
2,223
|
|
|
2,480
|
|
|
2,335
|
|
|
Vehicle
|
2,118
|
|
|
3,038
|
|
|
3,489
|
|
|
eMobility
|
292
|
|
|
321
|
|
|
320
|
|
|
Total net sales
|
$
|
17,858
|
|
|
$
|
21,390
|
|
|
$
|
21,609
|
|
|
|
|
|
|
|
|
|
Segment operating profit (loss)
|
|
|
|
|
|
|
Electrical Americas
|
$
|
1,352
|
|
|
$
|
1,549
|
|
|
$
|
1,372
|
|
|
Electrical Global
|
750
|
|
|
897
|
|
|
833
|
|
|
Hydraulics
|
186
|
|
|
193
|
|
|
267
|
|
|
Aerospace
|
414
|
|
|
595
|
|
|
503
|
|
|
Vehicle
|
243
|
|
|
460
|
|
|
611
|
|
|
eMobility
|
(8)
|
|
|
17
|
|
|
44
|
|
|
Total segment operating profit
|
2,937
|
|
|
3,711
|
|
|
3,630
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
(354)
|
|
|
(367)
|
|
|
(382)
|
|
|
Interest expense - net
|
(149)
|
|
|
(199)
|
|
|
(258)
|
|
|
Pension and other postretirement benefits expense
|
(40)
|
|
|
(12)
|
|
|
(1)
|
|
|
Restructuring program charges
|
(214)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Arbitration decision expense
|
—
|
|
|
—
|
|
|
(275)
|
|
|
Other expense - net
|
(434)
|
|
|
(542)
|
|
|
(290)
|
|
|
Income before income taxes
|
1,746
|
|
|
2,591
|
|
|
2,424
|
|
|
Income tax expense
|
331
|
|
|
378
|
|
|
278
|
|
|
Net income
|
1,415
|
|
|
2,213
|
|
|
2,146
|
|
|
Less net income for noncontrolling interests
|
(5)
|
|
|
(2)
|
|
|
(1)
|
|
|
Net income attributable to Eaton ordinary shareholders
|
$
|
1,410
|
|
|
$
|
2,211
|
|
|
$
|
2,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Identifiable assets
|
|
|
|
|
|
|
Electrical Americas
|
$
|
2,333
|
|
|
$
|
2,360
|
|
|
$
|
2,529
|
|
|
Electrical Global
|
2,334
|
|
|
2,319
|
|
|
2,121
|
|
|
Hydraulics
|
—
|
|
|
1,293
|
|
|
1,334
|
|
|
Aerospace
|
1,363
|
|
|
1,562
|
|
|
1,118
|
|
|
Vehicle
|
1,950
|
|
|
2,145
|
|
|
2,289
|
|
|
eMobility
|
180
|
|
|
141
|
|
|
139
|
|
|
Total identifiable assets
|
8,160
|
|
|
9,820
|
|
|
9,530
|
|
|
Goodwill
|
12,903
|
|
|
13,456
|
|
|
13,328
|
|
|
Other intangible assets
|
4,175
|
|
|
4,638
|
|
|
4,846
|
|
|
Corporate
|
4,099
|
|
|
3,514
|
|
|
3,388
|
|
|
Assets held for sale
|
2,487
|
|
|
1,377
|
|
|
—
|
|
|
Total assets
|
$
|
31,824
|
|
|
$
|
32,805
|
|
|
$
|
31,092
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property, plant and equipment
|
|
|
|
|
|
|
Electrical Americas
|
$
|
95
|
|
|
$
|
160
|
|
|
$
|
139
|
|
|
Electrical Global
|
71
|
|
|
106
|
|
|
95
|
|
|
Hydraulics
|
41
|
|
|
80
|
|
|
98
|
|
|
Aerospace
|
59
|
|
|
61
|
|
|
48
|
|
|
Vehicle
|
77
|
|
|
127
|
|
|
143
|
|
|
eMobility
|
24
|
|
|
8
|
|
|
4
|
|
|
Total
|
367
|
|
|
542
|
|
|
527
|
|
|
Corporate
|
22
|
|
|
45
|
|
|
38
|
|
|
Total expenditures for property, plant and equipment
|
$
|
389
|
|
|
$
|
587
|
|
|
$
|
565
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment
|
|
|
|
|
|
|
Electrical Americas
|
$
|
101
|
|
|
$
|
118
|
|
|
$
|
121
|
|
|
Electrical Global
|
94
|
|
|
93
|
|
|
98
|
|
|
Hydraulics
|
—
|
|
|
58
|
|
|
56
|
|
|
Aerospace
|
53
|
|
|
37
|
|
|
36
|
|
|
Vehicle
|
98
|
|
|
102
|
|
|
104
|
|
|
eMobility
|
6
|
|
|
5
|
|
|
5
|
|
|
Total
|
352
|
|
|
413
|
|
|
420
|
|
|
Corporate
|
56
|
|
|
52
|
|
|
53
|
|
|
Total depreciation of property, plant and equipment
|
$
|
408
|
|
|
$
|
465
|
|
|
$
|
473
|
|
Geographic Region Information
Net sales are measured based on the geographic destination of sales. Long-lived assets consist of property, plant and equipment - net.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales
|
|
|
|
|
|
|
United States
|
$
|
10,044
|
|
|
$
|
12,336
|
|
|
$
|
12,034
|
|
|
Canada
|
757
|
|
|
941
|
|
|
931
|
|
|
Latin America
|
939
|
|
|
1,312
|
|
|
1,442
|
|
|
Europe
|
3,818
|
|
|
4,311
|
|
|
4,553
|
|
|
Asia Pacific
|
2,300
|
|
|
2,490
|
|
|
2,649
|
|
|
Total
|
$
|
17,858
|
|
|
$
|
21,390
|
|
|
$
|
21,609
|
|
|
|
|
|
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
United States
|
$
|
1,510
|
|
|
$
|
1,821
|
|
|
$
|
1,898
|
|
|
Canada
|
25
|
|
|
24
|
|
|
20
|
|
|
Latin America
|
249
|
|
|
316
|
|
|
286
|
|
|
Europe
|
738
|
|
|
797
|
|
|
723
|
|
|
Asia Pacific
|
442
|
|
|
538
|
|
|
540
|
|
|
Total
|
$
|
2,964
|
|
|
$
|
3,496
|
|
|
$
|
3,467
|
|
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 2020 net sales of $17.9 billion. Eaton’s mission is to improve the quality of life and the environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic and mechanical power – more safely, more efficiently and more reliably. Eaton has approximately 92,000 employees in 60 countries and sells products to customers in more than 175 countries.
Summary of Results of Operations
During 2020, the Company's results of operations were impacted by the COVID-19 pandemic. Organic sales were down 11% in 2020 primarily due to the impact from the COVID-19 pandemic. The divestitures of the Lighting and Automotive Fluid Conveyance businesses reduced sales, partially offset by growth from the acquisitions of Souriau-Sunbank Connection Technologies (Souriau-Sunbank) and Power Distribution, Inc.
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions. Restructuring charges incurred under this program were $214 in 2020. These restructuring activities are expected to incur additional expenses of $61 and $5 in 2021 and 2022, respectively, primarily comprised of plant closing and other costs, resulting in total estimated charges of $280 for the entire program. The projected mature year savings from these restructuring actions are expected to be $200 when fully implemented in 2023. Additional information related to this restructuring is presented in Note 16.
On February 25, 2020, Eaton acquired Power Distribution, Inc. (PDI) a leading supplier of mission critical power distribution, static switching, and power monitoring equipment and services for data centers and industrial and commercial customers. The company is headquartered in Richmond, Virginia, and had 2019 sales of $125. PDI is reported within the Electrical Americas business segment.
On March 2, 2020, Eaton sold its Lighting business to Signify N.V. for a cash purchase price of $1.4 billion. The Company recognized a pre-tax gain of $221. The Lighting business, which had sales of $1.6 billion in 2019 as part of the Electrical Americas business segment, serves customers in commercial, industrial, residential and municipal markets.
On January 21, 2020, Eaton entered into an agreement to sell its Hydraulics business to Danfoss A/S, a Danish industrial company, for $3.3 billion in cash. Eaton’s Hydraulics business is a global leader in hydraulics components, systems, and services for industrial and mobile equipment. The business had sales of $1.8 billion and $2.2 billion for the years ended December 31, 2020 and 2019, respectively. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close by the end of the first quarter or early second quarter of 2021.
During the fourth quarter of 2019 and first quarter of 2020, the Company determined the Lighting business and Hydraulics business, respectively, met the criteria to be classified as held for sale. Therefore, assets and liabilities of these businesses have been presented as held for sale in the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2020, respectively. Assets and liabilities classified as held for sale are measured at the lower of carrying value or fair value less costs to sell. There was no write-down as fair values of both the Lighting business and Hydraulics business assets less their costs to sell exceeded their respective carrying value. Depreciation and amortization expense is not recorded for the period in which Other long-lived assets are classified as held for sale.
On December 15, 2020, Eaton signed an agreement to acquire a 50 percent stake in HuanYu High Tech, a subsidiary of HuanYu Group that manufactures and markets low-voltage circuit breakers and contactors in China, and throughout the Asia-Pacific region. HuanYu High Tech had 2019 sales of $106 and has production operations in Wenzhou, China. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close in the second quarter of 2021. Eaton expects to account for this investment on the equity method of accounting and will report it within the Electrical Global business segment.
On January 28, 2021, Eaton signed an agreement to acquire Tripp Lite, a leading supplier of power quality products and connectivity solutions including single-phase uninterruptible power supply systems, rack power distribution units, surge protectors, and enclosures for data centers, industrial, medical, and communications markets in the Americas. Under the terms of the agreement, Eaton will pay $1.65 billion for Tripp Lite. The transaction is subject to customary closing conditions and is expected to close in the middle of 2021. Tripp Lite will be reported within the Electrical Americas business segment.
On January 31, 2021, Eaton signed an agreement to acquire Cobham Mission Systems (CMS), a leading manufacturer of air-to-air refueling systems, environmental systems, and actuation primarily for defense markets. Under the terms of the agreement, Eaton will pay $2.83 billion. The transaction is subject to customary closing conditions and is expected to close in the second half of 2021. CMS will be reported within the Aerospace business segment.
During 2019, the Company’s results of operations were impacted by negative currency translation and weaker than expected growth in the Company’s end markets, particularly in the second half of 2019. Despite the declining market conditions and unfavorable impact of currency translation, the Company generated solid operating margins and Net income per ordinary share.
On April 15, 2019, Eaton completed the acquisition of an 82.275% controlling interest in Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. (Ulusoy Elektrik), a leading manufacturer of electrical switchgear based in Ankara, Turkey, with a primary focus on medium voltage solutions for industrial and utility customers. Its sales for the 12 months ended September 30, 2018 were $126. The purchase price for the shares was $214 on a cash and debt free basis. As required by the Turkish capital markets legislation, Eaton filed an application to execute a mandatory tender offer for the remaining shares shortly after the transaction closed. During the tender offer, Eaton purchased additional shares for $33 through July 2019 to increase its ownership interest to 93.7%. Ulusoy Elektrik is reported within the Electrical Global business segment.
On July 19, 2019, Eaton acquired Innovative Switchgear Solutions, Inc. (ISG), a specialty manufacturer of medium-voltage electrical equipment serving the North American utility, commercial and industrial markets. Its 2018 sales were approximately $18. ISG is reported within the Electrical Americas business segment.
On December 20, 2019, Eaton acquired the Souriau-Sunbank business of TransDigm Group Inc. for a cash purchase price of $907, net of cash received. Headquartered in Versailles, France, Souriau-Sunbank is a global leader in highly engineered electrical interconnect solutions for harsh environments in the aerospace, defense, industrial, energy, and transport markets. Eaton’s Consolidated Financial Statements include Souriau-Sunbank’s results of operations. Souriau-Sunbank's sales for the years ended December 31, 2020 and 2019 were $287 and $3, respectively. Souriau-Sunbank is reported within the Aerospace business segment.
On December 31, 2019, Eaton sold its Automotive Fluid Conveyance Business. The transaction resulted in a pre-tax loss of $66 which was recorded in Other expense - net. This business was reported within the Vehicle business segment.
During 2018, the Company's results of operations delivered strong sales growth as major global end markets expanded.
As discussed in Note 10, certain Eaton subsidiaries acquired in the 2012 acquisition of Cooper Industries have been ordered to pay $293 by an arbitration panel. The panel’s award, issued on August 23, 2018, relate to claims brought by Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”) in 2011. A Texas state court confirmed the arbitration award at the confirmation hearing, which was held on October 12, 2018. On November 2, 2018, the Company appealed. On November 28, 2018, the Company paid the full judgment plus accrued post-judgment interest to Pneumo Abex and preserved its rights, including to appeal. On April 25, 2019, the appeal that Cooper Industries filed was dismissed. The impact of the arbitration award discussed in Note 10 was an after-tax expense of $206 in the third quarter of 2018, reducing earnings per share by $0.48.
Additional information related to acquisitions and divestitures of businesses, and the arbitration decision expense, is presented in Note 2 and Note 10, respectively.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
Net sales
|
$
|
17,858
|
|
|
$
|
21,390
|
|
|
$
|
21,609
|
|
|
Net income attributable to Eaton ordinary shareholders
|
1,410
|
|
|
2,211
|
|
|
2,145
|
|
|
Net income per share attributable to Eaton ordinary shareholders - diluted
|
$
|
3.49
|
|
|
$
|
5.25
|
|
|
$
|
4.91
|
|
COVID-19
The Company was impacted by the COVID-19 pandemic in 2020. Organic sales were down 11% in 2020 primarily due to the impact from the COVID-19 pandemic. The Company monitors the pandemic’s impact throughout the world, including guidance from governmental authorities and world health organizations. Our businesses are focused on cost control to offset the volume declines. During 2020, the Company implemented the following actions:
•Reduction of senior executive base salaries in the second and third quarters
•Reduction in cash retainer for non-employee members of the Board of Directors of 50% and 25% in the second and third quarters, respectively
•Implementation of unpaid leave programs
•Elimination of merit increases for all of 2020
•Reduction of discretionary expenses and implementation of travel and hiring freezes
•Elimination of nonessential capital spending
We anticipate that several of our markets will take some time to recover. Therefore in the second quarter of 2020, we decided to undertake a multi-year restructuring program discussed in Note 16 to deal with that weakness. The principal end markets affected are commercial aerospace, oil and gas, NAFTA Class 8 trucks, and North American/European light vehicles.
Eaton's products and support services are vital to hospitals, emergency services, military sites, utilities, public works, transportation and shipping providers. In addition, data centers, retail outlets, airports and governments, as well as the networks that support schools and remote workers, rely on the Company's products to serve their customers and communities. As a result, the Company's businesses are deemed essential to continue operating by almost all governments around the world, and all of the Company's plants are currently operating.
The Company is doing the following to protect the safety and health of its workforce, as well as support customer's needs during this pandemic:
Protect our employees
•Trained our employees at sites around the world in cleaning and disinfecting protocols
•Enacted social distancing procedures, staggered shifts, a rotating office work schedule, and modified workspace and meeting space layouts
•Requiring employees to stay at home if they are feeling ill, and encouraging increased hand washing and hygiene practices across all sites
•Advised employees to take advantage of flexible work options
•Restricting visitors to all sites
•Consulting regularly with doctors and health care organizations
•Updating the Company's response plans as new information becomes available
In the event an employee suspects they have been exposed to COVID-19, or testing confirms it, sites will implement a response plan that includes:
•Mandatory quarantines
•Communication with all who may have been exposed
•Disinfecting work stations and common areas
•Shutting down the facility if warranted
These actions are aligned with preventive health protocols of governmental authorities and health organizations including the Centers for Disease Control (U.S.) and the World Health Organization.
Support our customers
Eaton has activated its business continuity management plans across the organization, which includes:
•Staying in close contact with our suppliers to manage the supply chain
•Equipping our service technicians with additional personal protective equipment as needed
•Coordinating with local, state and national governments
•Following governmental and health authorities' guidelines