Edgar Filing: Eaton Corp plc

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

Commission file number 000-54863

EATON CORPORATION plc

(Exact name of registrant as specified in its charter)



Ireland		98-1059235
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

Eaton House, 30 Pembroke Road, Dublin 4, Ireland		-
(Address of principal executive offices)		(Zip Code)



			+353 1637 2900
			(Registrant's telephone number, including area code)

			Not applicable
			(Former name, former address and former fiscal year if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

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

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

There were 454.7 million Ordinary Shares outstanding as of June 30, 2016.

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TABLE OF CONTENTS
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS	2
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28
ITEM 4. CONTROLS AND PROCEDURES	28
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS	29
ITEM 1A. RISK FACTORS	29
ITEM 2. UNRESTRICTED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	29
ITEM 6. EXHIBITS	29
SIGNATURES	30
EXHIBIT INDEX	31
EX-12
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

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PART I — FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS.

EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF INCOME



	Three months ended June 30						Six months ended June 30
(In millions except for per share data)	2016			2015			2016			2015
Net sales	$	5,080		$	5,372		$	9,893		$	10,595

Cost of products sold	3,419			3,675			6,710			7,268
Selling and administrative expense	897			901			1,789			1,816
Research and development expense	149			158			298			316
Interest expense - net	57			59			114			116
Other expense (income) - net	5			(19		)	(13		)	(24		)
Income before income taxes	553			598			995			1,103
Income tax expense	61			63			100			101
Net income	492			535			895			1,002
Less net income for noncontrolling interests	(1		)	—			—			(1		)
Net income attributable to Eaton ordinary shareholders	$	491		$	535		$	895		$	1,001

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	1.07		$	1.14		$	1.95		$	2.13
Basic	1.08			1.14			1.96			2.14

Weighted-average number of ordinary shares outstanding
Diluted	458.3			469.2			459.0			469.6
Basic	457.0			467.6			457.8			467.7

Cash dividends declared per ordinary share	$	0.57		$	0.55		$	1.14		$	1.10

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

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EATON CORPORATION plc

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three months ended June 30					Six months ended June 30
(In millions)	2016			2015		2016			2015
Net income	$	492		$	535	$	895		$	1,002
Less net income for noncontrolling interests	(1		)	—		—			(1		)
Net income attributable to Eaton ordinary shareholders	491			535		895			1,001

Other comprehensive (loss) income, net of tax
Currency translation and related hedging instruments	(296		)	209		(35		)	(511		)
Pensions and other postretirement benefits	53			18		87			104
Cash flow hedges	(12		)	3		(34		)	3
Other comprehensive (loss) income attributable to Eaton ordinary shareholders	(255		)	230		18			(404		)

Total comprehensive income attributable to Eaton ordinary shareholders	$	236		$	765	$	913		$	597

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

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EATON CORPORATION plc

CONDENSED CONSOLIDATED BALANCE SHEETS



(In millions)	June 30, 2016		December 31, 2015
Assets
Current assets
Cash	$	323	$	268
Short-term investments	146		177
Accounts receivable - net	3,628		3,479
Inventory	2,323		2,323
Prepaid expenses and other current assets	406		369
Total current assets	6,826		6,616

Property, plant and equipment - net	3,551		3,565

Other noncurrent assets
Goodwill	13,450		13,479
Other intangible assets	5,795		6,014
Deferred income taxes	413		362
Other assets	1,119		960
Total assets	$	31,154	$	30,996

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	557	$	426
Current portion of long-term debt	252		242
Accounts payable	1,802		1,758
Accrued compensation	316		366
Other current liabilities	1,889		1,833
Total current liabilities	4,816		4,625

Noncurrent liabilities
Long-term debt	7,605		7,746
Pension liabilities	1,554		1,586
Other postretirement benefits liabilities	433		440
Deferred income taxes	365		390
Other noncurrent liabilities	1,017		978
Total noncurrent liabilities	10,974		11,140

Shareholders’ equity
Eaton shareholders’ equity	15,320		15,186
Noncontrolling interests	44		45
Total equity	15,364		15,231
Total liabilities and equity	$	31,154	$	30,996

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

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EATON CORPORATION plc

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS



	Six months ended June 30
(In millions)	2016			2015
Operating activities
Net income	$	895		$	1,002
Adjustments to reconcile to net cash provided by operating activities
Depreciation and amortization	467			460
Deferred income taxes	(74		)	(29		)
Pension and other postretirement benefits expense	116			158
Contributions to pension plans	(74		)	(258		)
Contributions to other postretirement benefits plans	(18		)	(16		)
Excess tax benefit from equity-based compensation	(3		)	—
Changes in working capital	(273		)	(506		)
Other - net	80			(155		)
Net cash provided by operating activities	1,116			656

Investing activities
Capital expenditures for property, plant and equipment	(246		)	(246		)
Cash received from (paid for) acquisitions of businesses, net of cash acquired	1			(38		)
Sales of short-term investments - net	38			109
Proceeds from sale of businesses	—			1
Other - net	3			(33		)
Net cash used in investing activities	(204		)	(207		)

Financing activities
Proceeds from borrowings	151			137
Payments on borrowings	(240		)	(404		)
Cash dividends paid	(521		)	(514		)
Exercise of employee stock options	37			46
Repurchase of shares	(295		)	(170		)
Excess tax benefit from equity-based compensation	3			—
Other - net	—			(7		)
Net cash used in financing activities	(865		)	(912		)

Effect of currency on cash	8			(15		)
Total increase (decrease) in cash	55			(478		)
Cash at the beginning of the period	268			781
Cash at the end of the period	$	323		$	303

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

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EATON CORPORATION plc

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Amounts are in millions unless indicated otherwise (per share data assume dilution).


Note 1.	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Eaton Corporation plc (Eaton or the Company) have been prepared in accordance with generally accepted accounting principles for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles (US GAAP) for complete financial statements. However, in the opinion of management, all adjustments (consisting of normal recurring accruals) have been made that are necessary for a fair presentation of the condensed consolidated financial statements for the interim periods.

This Form 10-Q should be read in conjunction with the consolidated financial statements and related notes included in Eaton’s 2015 Form 10-K. The interim period results are not necessarily indicative of the results to be expected for the full year. Management has evaluated subsequent events through the date this Form 10-Q was filed with the Securities and Exchange Commission.

During the first quarter of 2016, the Company adopted Accounting Standards Update 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the related debt liability rather than an asset. The Company has applied this standard retrospectively. The adoption of ASU 2015-03 resulted in the reclassification of $33 and $35 within the Company's Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, respectively, from Other noncurrent assets to a reduction in Long-term debt.

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recently Issued Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2016-02, Leases (Topic 842), (ASU 2016-02). This accounting standard requires that a lessee recognize a lease asset and a lease liability on its balance sheet for all leases, including operating leases, with a term greater than 12 months. ASU 2016-02 will require additional disclosures in the notes to the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2018. Eaton is evaluating the impact of ASU 2016-02 and an estimate of the impact to the consolidated financial statements cannot be made at this time.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers (ASU 2014-09). This accounting standard supersedes all existing US GAAP revenue recognition guidance. Under ASU 2014-09, a company will recognize revenue when it transfers the control of promised goods or services to customers in an amount that reflects the consideration which the company expects to collect in exchange for those goods or services. ASU 2014-09 will require additional disclosures in the notes to the consolidated financial statements and is effective for annual and interim reporting periods beginning after December 15, 2016. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date (ASU 2015-14). This accounting standard defers the effective date of ASU 2014-09 for one year and permits early adoption as of the original effective date. Eaton is evaluating the impact of ASU 2014-09 and an estimate of the impact to the consolidated financial statements cannot be made at this time.


Note 2.	ACQUISITIONS OF BUSINESSES

Acquisition of Ephesus Lighting, Inc.

On October 28, 2015, Eaton acquired Ephesus Lighting, Inc. (Ephesus). Ephesus is a leader in LED lighting for stadiums and other high lumen outdoor and industrial applications. Its sales for the 12 months ended September 30, 2015 were $23. Ephesus is reported within the Electrical Products business segment.

Acquisition of UK Safety Technology Manufacturer Oxalis Group Ltd.

On January 12, 2015, Eaton acquired Oxalis Group Ltd. (Oxalis). Oxalis is a manufacturer of closed-circuit television camera stations, public address and general alarm systems and other electrical products for the hazardous area, marine and industrial communications markets. Its sales for the 12 months ended December 31, 2014 were $9. Oxalis is reported within the Electrical Systems and Services business segment.

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Note 3.	ACQUISITION INTEGRATION CHARGES

Eaton incurs integration charges related to acquired businesses. A summary of these charges follows:



	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
Electrical Products	$	1	$	6	$	1	$	12
Electrical Systems and Services	—		4		1		7
Hydraulics	—		1		—		2
Total business segments	1		11		2		21
Corporate	—		1		—		2
Total acquisition integration charges before income taxes	1		12		2		23
Income taxes	—		4		1		8
Total after income taxes	$	1	$	8	$	1	$	15
Per ordinary share - diluted	$	—	$	0.02	$	—	$	0.03

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

Corporate acquisition integration charges in 2015 also related to the integration of Cooper. These charges were included in Selling and administrative expense. In Business Segment Information, the charges were included in Other corporate expense - net.


Note 4.	RESTRUCTURING CHARGES

During 2015, Eaton announced its intention to undertake actions to reduce its cost structure in all business segments and at corporate. Restructuring charges for the three and six months ended June 30, 2016, were $35 and $98, respectively, and were $4 and $14 for the three and six months ended June 30, 2015, respectively. The charges associated with restructuring activities are anticipated to be $145 in 2016 and $130 in 2017.

A summary of restructuring charges by type follows:



	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
Workforce reductions	$	20	$	3	$	77	$	12
Plant closings and other	15		1		21		2
Total	$	35	$	4	$	98	$	14

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A summary of restructuring charges by segment follows:



	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
Electrical Products	$	9	$	1	$	26	$	1
Electrical Systems & Services	3		—		13		—
Hydraulics	18		1		34		9
Aerospace	—		—		4		—
Vehicle	5		2		17		4
Corporate	—		—		4		—
Total	$	35	$	4	$	98	$	14

A summary of liabilities related to workforce reductions, plant closings and other associated costs follows:



	Workforce reductions			Plant closings and other			Total
Balance at December 31, 2014	$	—		$	—		$	—
Liability recognized	112			17			129
Payments	(59		)	(3		)	(62		)
Other adjustments	1			(14		)	(13		)
Balance at December 31, 2015	54			—			54
Liability recognized	77			21			98
Payments	(55		)	(9		)	(64		)
Other adjustments	(1		)	(11		)	(12		)
Balance at June 30, 2016	$	75		$	1		$	76

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


Note 5.	GOODWILL

A summary of goodwill follows:



	Electrical Products			Electrical Systems and Services			Hydraulics		Aerospace			Vehicle		Total
December 31, 2015	$	6,642		$	4,279		$	1,259	$	956		$	343	$	13,479
Additions	1			—			—		—			—		1
Translation	(21		)	(5		)	4		(10		)	2		(30		)
June 30, 2016	$	6,622		$	4,274		$	1,263	$	946		$	345	$	13,450

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Note 6.	RETIREMENT BENEFITS PLANS

The components of retirement benefits expense follow:



	United States pension benefit expense						Non-United States pension benefit expense						Other postretirement benefits expense
	Three months ended June 30
	2016			2015			2016			2015			2016			2015
Service cost	$	27		$	30		$	17		$	19		$	1		$	1
Interest cost	32			39			16			18			5			6
Expected return on plan assets	(62		)	(65		)	(24		)	(25		)	(2		)	(1		)
Amortization	23			30			8			10			(2		)	1
	20			34			17			22			2			7
Settlements and curtailments	18			19			—			—			—			—
Total expense	$	38		$	53		$	17		$	22		$	2		$	7



	United States pension benefit expense						Non-United States pension benefit expense						Other postretirement benefits expense
	Six months ended June 30
	2016			2015			2016			2015			2016			2015
Service cost	$	55		$	61		$	33		$	37		$	2		$	3
Interest cost	63			78			32			36			9			12
Expected return on plan assets	(125		)	(131		)	(48		)	(50		)	(3		)	(2		)
Amortization	46			60			17			20			(4		)	1
	39			68			34			43			4			14
Settlements and curtailments	39			33			—			—			—			—
Total expense	$	78		$	101		$	34		$	43		$	4		$	14


Note 7.	LEGAL CONTINGENCIES

Eaton is subject to a broad range of claims, administrative and legal proceedings such as lawsuits that relate to contractual allegations, tax audits, patent infringement, personal injuries, antitrust matters and employment-related matters. Eaton is also subject to asbestos claims from historic products which may have contained asbestos. Insurance may cover some of the costs associated with these claims. Although it is not possible to predict with certainty the outcome or cost of these matters, the Company believes they will not have a material adverse effect on the consolidated financial statements.

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


Note 8.	INCOME TAXES

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

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Note 9.	EQUITY

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

The changes in Shareholders’ equity follow:



	Eaton shareholders’ equity			Noncontrolling interests			Total equity
Balance at December 31, 2015	$	15,186		$	45		$	15,231
Net income	895			—			895
Other comprehensive income	18			—			18
Cash dividends paid	(521		)	—			(521		)
Issuance of shares under equity-based compensation plans - net	66			—			66
Repurchase of shares	(324		)	—			(324		)
Change in capital	—			(1		)	(1		)
Balance at June 30, 2016	$	15,320		$	44		$	15,364

The changes in Accumulated other comprehensive loss follow:



	Currency translation and related hedging instruments			Pensions and other postretirement benefits			Cash flow hedges			Total
Balance at December 31, 2015	$	(2,492	)	$	(1,374	)	$	3		$	(3,863	)
Other comprehensive (loss) income before reclassifications	(35		)	22			(33		)	(46		)
Amounts reclassified from Accumulated other comprehensive loss (income)	—			65			(1		)	64
Net current-period Other comprehensive income (loss)	(35		)	87			(34		)	18
Balance at June 30, 2016	$	(2,527	)	$	(1,287	)	$	(31	)	$	(3,845	)

The reclassifications out of Accumulated other comprehensive loss follow:



	Six months ended June 30, 2016				Consolidated statements of income classification
Amortization of defined benefit pensions and other postretirement benefits items
Actuarial loss and prior service cost	$	(98	)	¹
Tax benefit	33
Total, net of tax	(65		)

Gains and (losses) on cash flow hedges
Currency exchange contracts	1				Cost of products sold
Tax expense	—
Total, net of tax	1

Total reclassifications for the period	$	(64	)

¹ These components of Accumulated other comprehensive loss are included in the computation of net periodic benefit cost. See Note 6 for additional information about pension and other postretirement benefits items.

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Net Income Per Share Attributable to Eaton Ordinary Shareholders

A summary of the calculation of net income per share attributable to Eaton ordinary shareholders follows:



	Three months ended June 30				Six months ended June 30
(Shares in millions)	2016		2015		2016		2015
Net income attributable to Eaton ordinary shareholders	$	491	$	535	$	895	$	1,001

Weighted-average number of ordinary shares outstanding - diluted	458.3		469.2		459.0		469.6
Less dilutive effect of equity-based compensation	1.3		1.6		1.2		1.9
Weighted-average number of ordinary shares outstanding - basic	457.0		467.6		457.8		467.7

Net income per share attributable to Eaton ordinary shareholders
Diluted	$	1.07	$	1.14	$	1.95	$	2.13
Basic	1.08		1.14		1.96		2.14

For the second quarter and first six months of 2016, 1.5 million and 1.9 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the period and their effect, accordingly, would have been antidilutive. For the second quarter and first six months of 2015, 1.3 million and 1.1 million stock options, respectively, were excluded from the calculation of diluted net income per share attributable to Eaton ordinary shareholders because the exercise price of the options exceeded the average market price of the ordinary shares during the periods and their effect, accordingly, would have been antidilutive.


Note 10.	FAIR VALUE MEASUREMENTS

Fair value is measured based on an exit price, representing the amount that would be received to sell an asset or paid to satisfy a liability in an orderly transaction between market participants. Fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a fair value hierarchy is established, which categorizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

A summary of financial instruments recognized at fair value, and the fair value measurements used, follows:



	Total			Level 1		Level 2			Level 3
June 30, 2016
Cash	$	323		$	323	$	—		$	—
Short-term investments	146			146		—			—
Net derivative contracts	152			—		152			—
Long-term debt converted to floating interest rates by interest rate swaps - net	(200		)	—		(200		)	—

December 31, 2015
Cash	$	268		$	268	$	—		$	—
Short-term investments	177			177		—			—
Net derivative contracts	86			—		86			—
Long-term debt converted to floating interest rates by interest rate swaps - net	(94		)	—		(94		)	—

Eaton values its financial instruments using an industry standard market approach, in which prices and other relevant information is generated by market transactions involving identical or comparable assets or liabilities. No financial instruments were measured using unobservable inputs.

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Other Fair Value Measurements

Long-term debt and the current portion of long-term debt had a carrying value of $7,857 and fair value of $8,506 at June 30, 2016 compared to $7,988 and $8,231, respectively, at December 31, 2015. The fair value of Eaton's debt instruments were estimated using prevailing market interest rates on debt with similar creditworthiness, terms and maturities, and are considered a Level 2 fair value measurement.


Note 11.	DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, to a lesser extent, commodity contracts, to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes.

Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Condensed Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as:

•

Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value.

•

Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive loss and reclassified to income in the same period when the gain or loss on the hedged item is included in income.

•

Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the effective portion of the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive loss and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income.

The gain or loss from a derivative financial instrument designated as a hedge that is effective is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The change in fair value of a derivative financial instrument that is not effective as a hedge is immediately recognized in income.

For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. Gains and losses associated with commodity hedge contracts are classified in Cost of products sold.

Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated on an after-tax basis as non-derivative net investment hedging instruments was $97 at June 30, 2016 and $83 at December 31, 2015.

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Derivative Financial Statement Impacts

The fair value of derivative financial instruments recognized in the Condensed Consolidated Balance Sheets follows:



	Notional amount		Other current assets		Other noncurrent assets		Other current liabilities		Other noncurrent liabilities		Type of hedge	Term
June 30, 2016
Derivatives designated as hedges
Fixed-to-floating interest rate swaps	$	3,765	$	1	$	199	$	—	$	—	Fair value	1 month to 18 years
Forward starting floating-to-fixed interest rate swaps	400		—		—		—		19		Cash flow	12 years
Currency exchange contracts	859		6		1		21		14		Cash flow	1 to 36 months
Total			$	7	$	200	$	21	$	33

Derivatives not designated as hedges
Currency exchange contracts	$	3,469	$	35	$	—	$	38	$	—		1 to 24 months
Commodity contracts	50		2				—					1 to 12 months
Total			$	37	$	—	$	38	$	—

December 31, 2015
Derivatives designated as hedges
Fixed-to-floating interest rate swaps	$	3,715	$	—	$	96	$	—	$	2	Fair value	2 to 19 years
Forward starting floating-to-fixed interest rate swaps	50		—		—		—		—		Cash flow	12 years
Currency exchange contracts	724		18		1		8		6		Cash flow	1 to 36 months
Commodity contracts	1		—		—		—		—		Cash flow	1 to 12 months
Total			$	18	$	97	$	8	$	8

Derivatives not designated as hedges
Currency exchange contracts	$	4,198	$	27			$	40				1 to 12 months
Total			$	27			$	40

The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany sales and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts.

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The impact of derivative instruments to the Consolidated Statement of Income and Comprehensive Income follow:



	Gain (loss) recognized in other comprehensive (loss) income					Location of gain (loss) reclassified from Accumulated other comprehensive loss	Gain (loss) reclassified from Accumulated other comprehensive loss
	Three months ended June 30						Three months ended June 30
	2016			2015			2016			2015
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	(10	)	$	—	Interest expense - net	$	—		$	—
Currency exchange contracts	(10		)	8		Cost of products sold	(2		)	4
Total	$	(20	)	$	8		$	(2	)	$	4



	Gain (loss) recognized in other comprehensive (loss) income					Location of gain (loss) reclassified from Accumulated other comprehensive loss	Gain (loss) reclassified from Accumulated other comprehensive loss
	Six months ended June 30						Six months ended June 30
	2016			2015			2016		2015
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	(19	)	$	—	Interest expense - net	$	—	$	—
Currency exchange contracts	(32		)	10		Cost of products sold	1		6
Total	$	(51	)	$	10		$	1	$	6

Amounts recognized in net income follow:



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
Derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps	$	30		$	(51	)	$	106		$	(3	)
Related long-term debt converted to floating interest rates by interest rate swaps	(30		)	51			(106		)	3
	$	—		$	—		$	—		$	—

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


Note 12.	INVENTORY

The components of inventory follow:



	June 30, 2016			December 31, 2015
Raw materials	$	917		$	885
Work-in-process	430			412
Finished goods	1,075			1,131
Inventory at FIFO	2,422			2,428
Excess of FIFO over LIFO cost	(99		)	(105		)
Total inventory	$	2,323		$	2,323

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Note 13.	BUSINESS SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. Eaton’s operating segments are Electrical Products, Electrical Systems and Services, Hydraulics, Aerospace and Vehicle. Operating profit includes the operating profit from intersegment sales. For additional information regarding Eaton’s business segments, see Note 15 to the Consolidated Financial Statements contained in the 2015 Form 10-K.



	Three months ended June 30						Six months ended June 30
	2016			2015			2016			2015
Net sales
Electrical Products	$	1,784		$	1,784		$	3,464		$	3,475
Electrical Systems and Services	1,429			1,502			2,771			2,950
Hydraulics	589			643			1,140			1,308
Aerospace	447			454			892			918
Vehicle	831			989			1,626			1,944
Total net sales	$	5,080		$	5,372		$	9,893		$	10,595

Segment operating profit
Electrical Products	$	322		$	276		$	593		$	536
Electrical Systems and Services	178			223			337			409
Hydraulics	59			74			100			140
Aerospace	83			77			163			154
Vehicle	137			190			255			354
Total segment operating profit	779			840			1,448			1,593

Corporate
Amortization of intangible assets	(98		)	(102		)	(198		)	(204		)
Interest expense - net	(57		)	(59		)	(114		)	(116		)
Pension and other postretirement benefits expense	(13		)	(33		)	(27		)	(61		)
Other corporate expense - net	(58		)	(48		)	(114		)	(109		)
Income before income taxes	553			598			995			1,103
Income tax expense	61			63			100			101
Net income	492			535			895			1,002
Less net income for noncontrolling interests	(1		)	—			—			(1		)
Net income attributable to Eaton ordinary shareholders	$	491		$	535		$	895		$	1,001


Note 14.	CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

On November 14, 2013, Eaton Corporation registered senior notes under the Securities Act of 1933 (the Senior Notes). Eaton and certain other of Eaton's 100% owned direct and indirect subsidiaries (the Guarantors) fully and unconditionally guaranteed (subject, in the case of the Guarantors, other than Eaton, to customary release provisions as described below), on a joint and several basis, the Senior Notes. The following condensed consolidating financial statements are included so that separate financial statements of Eaton, Eaton Corporation and each of the Guarantors are not required to be filed with the Securities and Exchange Commission. The consolidating adjustments primarily relate to eliminations of investments in subsidiaries and intercompany balances and transactions. The condensed consolidating financial statements present investments in subsidiaries using the equity method of accounting.

The guarantee of a Guarantor that is not a parent of the issuer will be automatically and unconditionally released and discharged in the event of any sale of the Guarantor or of all or substantially all of its assets, or in connection with the release or termination of the Guarantor as a guarantor under all other U.S. debt securities or U.S. syndicated credit facilities, subject to limitations set forth in the indenture. The guarantee of a Guarantor that is a direct or indirect parent of the issuer will only be automatically and unconditionally released and discharged in connection with the release or termination of such Guarantor as a guarantor under all other debt securities or syndicated credit facilities (in both cases, U.S. or otherwise), subject to limitations set forth in the indenture.

During 2015 and 2016, the Company undertook certain steps to restructure ownership of various subsidiaries. The transactions were entirely among wholly-owned subsidiaries under the common control of Eaton. This restructuring has been reflected as of the beginning of the earliest period presented below.




CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2016
	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	1,644		$	1,640		$	3,065		$	(1,269	)	$	5,080

Cost of products sold	—			1,263			1,197			2,230			(1,271		)	3,419
Selling and administrative expense	2			353			192			350			—			897
Research and development expense	—			55			46			48			—			149
Interest expense (income) - net	—			57			6			(7		)	1			57
Other expense (income) - net	—			12			4			(11		)	—			5
Equity in loss (earnings) of subsidiaries, net of tax	(594		)	(155		)	(820		)	(141		)	1,710			—
Intercompany expense (income) - net	101			(46		)	317			(372		)	—			—
Income (loss) before income taxes	491			105			698			968			(1,709		)	553
Income tax expense (benefit)	—			13			13			35			—			61
Net income (loss)	491			92			685			933			(1,709		)	492
Less net loss (income) for noncontrolling interests	—			—			—			(2		)	1			(1		)
Net income (loss) attributable to Eaton ordinary shareholders	$	491		$	92		$	685		$	931		$	(1,708	)	$	491

Other comprehensive income (loss)	$	(255	)	$	(7	)	$	(251	)	$	(334	)	$	592		$	(255	)
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	236		$	85		$	434		$	597		$	(1,116	)	$	236




CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2015
	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	1,806		$	1,705		$	3,248		$	(1,387	)	$	5,372

Cost of products sold	—			1,433			1,273			2,322			(1,353		)	3,675
Selling and administrative expense	2			368			172			359			—			901
Research and development expense	—			66			49			43			—			158
Interest expense (income) - net	—			58			5			(2		)	(2		)	59
Other expense (income) - net	—			11			(7		)	(23		)	—			(19		)
Equity in loss (earnings) of subsidiaries, net of tax	(619		)	(58		)	(802		)	(127		)	1,606			—
Intercompany expense (income) - net	82			(267		)	481			(296		)	—			—
Income (loss) before income taxes	535			195			534			972			(1,638		)	598
Income tax expense (benefit)	—			41			(38		)	75			(15		)	63
Net income (loss)	535			154			572			897			(1,623		)	535
Less net loss (income) for noncontrolling interests	—			—			—			(1		)	1			—
Net income (loss) attributable to Eaton ordinary shareholders	$	535		$	154		$	572		$	896		$	(1,622	)	$	535

Other comprehensive income (loss)	$	230		$	19		$	235		$	288		$	(542	)	$	230
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	765		$	173		$	807		$	1,184		$	(2,164	)	$	765

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2016

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	3,182		$	3,210		$	5,943		$	(2,442	)	$	9,893

Cost of products sold	—			2,459			2,392			4,305			(2,446		)	6,710
Selling and administrative expense	4			718			386			681			—			1,789
Research and development expense	—			117			95			86			—			298
Interest expense (income) - net	—			110			9			(10		)	5			114
Other expense (income) - net	—			16			(3		)	(26		)	—			(13		)
Equity in loss (earnings) of subsidiaries, net of tax	(1,098		)	(325		)	(1,489		)	(234		)	3,146			—
Intercompany expense (income) - net	199			(88		)	577			(688		)	—			—
Income (loss) before income taxes	895			175			1,243			1,829			(3,147		)	995
Income tax expense (benefit)	—			20			14			66			—			100
Net income (loss)	895			155			1,229			1,763			(3,147		)	895
Less net loss (income) for noncontrolling interests	—			—			—			(2		)	2			—
Net income (loss) attributable to Eaton ordinary shareholders	$	895		$	155		$	1,229		$	1,761		$	(3,145	)	$	895

Other comprehensive income (loss)	$	18		$	33		$	25		$	(36	)	$	(22	)	$	18
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	913		$	188		$	1,254		$	1,725		$	(3,167	)	$	913

CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2015

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net sales	$	—		$	3,508		$	3,401		$	6,364		$	(2,678	)	$	10,595

Cost of products sold	—			2,743			2,568			4,599			(2,642		)	7,268
Selling and administrative expense	4			745			348			719			—			1,816
Research and development expense	—			137			94			85			—			316
Interest expense (income) - net	—			112			11			(7		)	—			116
Other expense (income) - net	—			6			(8		)	(22		)	—			(24		)
Equity in loss (earnings) of subsidiaries, net of tax	(1,164		)	(267		)	(1,515		)	(253		)	3,199			—
Intercompany expense (income) - net	159			(308		)	752			(603		)	—			—
Income (loss) before income taxes	1,001			340			1,151			1,846			(3,235		)	1,103
Income tax expense (benefit)	—			19			(17		)	116			(17		)	101
Net income (loss)	1,001			321			1,168			1,730			(3,218		)	1,002
Less net loss (income) for noncontrolling interests	—			—			—			(2		)	1			(1		)
Net income (loss) attributable to Eaton ordinary shareholders	$	1,001		$	321		$	1,168		$	1,728		$	(3,217	)	$	1,001

Other comprehensive income (loss)	$	(404	)	$	63		$	(385	)	$	(465	)	$	787		$	(404	)
Total comprehensive income (loss) attributable to Eaton ordinary shareholders	$	597		$	384		$	783		$	1,263		$	(2,430	)	$	597

CONDENSED CONSOLIDATING BALANCE SHEETS JUNE 30, 2016

	Eaton Corporation plc		Eaton Corporation		Guarantors		Other subsidiaries		Consolidating adjustments			Total
Assets
Current assets
Cash	$	—	$	4	$	5	$	314	$	—		$	323
Short-term investments	—		—		1		145		—			146
Accounts receivable - net	—		506		1,100		2,022		—			3,628
Intercompany accounts receivable	10		710		4,143		3,378		(8,241		)	—
Inventory	—		370		637		1,392		(76		)	2,323
Prepaid expenses and other current assets	—		112		45		224		25			406
Total current assets	10		1,702		5,931		7,475		(8,292		)	6,826

Property, plant and equipment - net	—		885		720		1,946		—			3,551

Other noncurrent assets
Goodwill	—		1,355		6,264		5,831		—			13,450
Other intangible assets	—		175		3,528		2,092		—			5,795
Deferred income taxes	—		999		—		236		(822		)	413
Investment in subsidiaries	32,022		13,353		71,629		11,997		(129,001		)	—
Intercompany loans receivable	—		7,751		1,509		54,824		(64,084		)	—
Other assets	—		620		127		372		—			1,119
Total assets	$	32,032	$	26,840	$	89,708	$	84,773	$	(202,199	)	$	31,154

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	—	$	532	$	—	$	25	$	—		$	557
Current portion of long-term debt	—		251		—		1		—			252
Accounts payable	—		427		322		1,053		—			1,802
Intercompany accounts payable	157		4,042		2,917		1,125		(8,241		)	—
Accrued compensation	—		63		39		214		—			316
Other current liabilities	30		584		336		940		(1		)	1,889
Total current liabilities	187		5,899		3,614		3,358		(8,242		)	4,816

Noncurrent liabilities
Long-term debt	—		6,915		667		17		6			7,605
Pension liabilities	—		618		167		769		—			1,554
Other postretirement benefits liabilities	—		239		116		78		—			433
Deferred income taxes	—		—		755		432		(822		)	365
Intercompany loans payable	16,525		1,924		44,729		906		(64,084		)	—
Other noncurrent liabilities	—		371		211		435		—			1,017
Total noncurrent liabilities	16,525		10,067		46,645		2,637		(64,900		)	10,974

Shareholders’ equity
Eaton shareholders' equity	15,320		10,874		39,449		78,740		(129,063		)	15,320
Noncontrolling interests	—		—		—		38		6			44
Total equity	15,320		10,874		39,449		78,778		(129,057		)	15,364
Total liabilities and equity	$	32,032	$	26,840	$	89,708	$	84,773	$	(202,199	)	$	31,154

CONDENSED CONSOLIDATING BALANCE SHEETS DECEMBER 31, 2015

	Eaton Corporation plc		Eaton Corporation		Guarantors		Other subsidiaries		Consolidating adjustments			Total
Assets
Current assets
Cash	$	—	$	26	$	7	$	235	$	—		$	268
Short-term investments	—		—		2		175		—			177
Accounts receivable - net	—		512		1,030		1,937		—			3,479
Intercompany accounts receivable	1		842		3,888		2,928		(7,659		)	—
Inventory	—		357		651		1,395		(80		)	2,323
Prepaid expenses and other current assets	—		77		40		229		23			369
Total current assets	1		1,814		5,618		6,899		(7,716		)	6,616

Property, plant and equipment - net	—		930		750		1,885		—			3,565

Other noncurrent assets
Goodwill	—		1,355		6,264		5,860		—			13,479
Other intangible assets	—		182		3,624		2,208		—			6,014
Deferred income taxes	—		1,016		—		218		(872		)	362
Investment in subsidiaries	29,627		13,003		60,139		10,166		(112,935		)	—
Intercompany loans receivable	—		8,641		1,573		44,835		(55,049		)	—
Other assets	—		492		122		346		—			960
Total assets	$	29,628	$	27,433	$	78,090	$	72,417	$	(176,572	)	$	30,996

Liabilities and shareholders’ equity
Current liabilities
Short-term debt	$	—	$	408	$	—	$	18	$	—		$	426
Current portion of long-term debt	—		1		240		1		—			242
Accounts payable	—		392		260		1,106		—			1,758
Intercompany accounts payable	219		4,009		2,248		1,183		(7,659		)	—
Accrued compensation	—		77		53		236		—			366
Other current liabilities	1		644		318		875		(5		)	1,833
Total current liabilities	220		5,531		3,119		3,419		(7,664		)	4,625

Noncurrent liabilities
Long-term debt	—		7,053		675		17		1			7,746
Pension liabilities	—		639		165		782		—			1,586
Other postretirement benefits liabilities	—		245		118		77		—			440
Deferred income taxes	—		—		815		447		(872		)	390
Intercompany loans payable	14,222		2,962		36,432		1,433		(55,049		)	—
Other noncurrent liabilities	—		346		200		432		—			978
Total noncurrent liabilities	14,222		11,245		38,405		3,188		(55,920		)	11,140

Shareholders’ equity
Eaton shareholders' equity	15,186		10,657		36,566		65,773		(112,996		)	15,186
Noncontrolling interests	—		—		—		37		8			45
Total equity	15,186		10,657		36,566		65,810		(112,988		)	15,231
Total liabilities and equity	$	29,628	$	27,433	$	78,090	$	72,417	$	(176,572	)	$	30,996

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2016

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net cash provided by (used in) operating activities	$	(156	)	$	23		$	(298	)	$	1,547		$	—		$	1,116

Investing activities
Capital expenditures for property, plant and equipment	—			(40		)	(49		)	(157		)	—			(246		)
Cash received from (paid for) acquisitions of businesses, net of cash acquired	—			—			1			—			—			1
Sales (purchases) of short-term investments - net	—			—			2			36			—			38
Investments in affiliates	(1,250		)	—			(120		)	(1,370		)	2,740			—
Return of investments in affiliates	—			—			47			—			(47		)	—
Loans to affiliates	—			(284		)	(47		)	(4,236		)	4,567			—
Repayments of loans from affiliates	—			1,280			—			2,922			(4,202		)	—
Other - net	—			2			25			(24		)	—			3
Net cash provided by (used in) investing activities	(1,250		)	958			(141		)	(2,829		)	3,058			(204		)

Financing activities
Proceeds from borrowings	—			145			—			6			—			151
Payments on borrowings	—			—			(240		)	—			—			(240		)
Proceeds from borrowings from affiliates	2,203			1,385			782			197			(4,567		)	—
Payments on borrowings from affiliates	(18		)	(2,493		)	(1,658		)	(33		)	4,202			—
Capital contributions from affiliates	—			—			1,370			1,370			(2,740		)	—
Return of capital to affiliates	—			—			—			(47		)	47			—
Other intercompany financing activities	—			(43		)	183			(140		)	—			—
Cash dividends paid	(521		)	—			—			—			—			(521		)
Exercise of employee stock options	37			—			—			—			—			37
Repurchase of shares	(295		)	—			—			—			—			(295		)
Excess tax benefit from equity-based compensation	—			3			—			—			—			3
Net cash provided by (used in) financing activities	1,406			(1,003		)	437			1,353			(3,058		)	(865		)

Effect of currency on cash	—			—			—			8			—			8
Total increase (decrease) in cash	—			(22		)	(2		)	79			—			55
Cash at the beginning of the period	—			26			7			235			—			268
Cash at the end of the period	$	—		$	4		$	5		$	314		$	—		$	323

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2015

	Eaton Corporation plc			Eaton Corporation			Guarantors			Other subsidiaries			Consolidating adjustments			Total
Net cash provided by (used in) operating activities	$	(84	)	$	(272	)	$	95		$	917		$	—		$	656

Investing activities
Capital expenditures for property, plant and equipment	—			(47		)	(63		)	(136		)	—			(246		)
Cash received from (paid for) acquisitions of businesses, net of cash acquired	—			—			—			(38		)	—			(38		)
Sales (purchases) of short-term investments - net	—			—			—			109			—			109
Investments in affiliates	(1,482		)	—			(1,176		)	(1,482		)	4,140			—
Loans to affiliates	—			(307		)	(39		)	(6,027		)	6,373			—
Repayments of loans from affiliates	—			306			11			4,720			(5,037		)	—
Proceeds from sale of businesses	—			—			—			1			—			1
Other - net	—			(31		)	28			(30		)	—			(33		)
Net cash provided by (used in) investing activities	(1,482		)	(79		)	(1,239		)	(2,883		)	5,476			(207		)

Financing activities
Proceeds from borrowings	—			125			—			12			—			137
Payments on borrowings	—			(101		)	(301		)	(2		)	—			(404		)
Proceeds from borrowings from affiliates	2,242			3,775			314			42			(6,373		)	—
Payments on borrowings from affiliates	(39		)	(3,824		)	(1,160		)	(14		)	5,037			—
Capital contributions from affiliates	—			1,176			1,482			1,482			(4,140		)	—
Other intercompany financing activities	—			(959		)	804			155			—			—
Cash dividends paid	(514		)	—			—			—			—			(514		)
Exercise of employee stock options	46			—			—			—			—			46
Repurchase of shares	(170		)	—			—			—			—			(170		)
Other - net	—			—			—			(7		)	—			(7		)
Net cash provided by (used in) financing activities	1,565			192			1,139			1,668			(5,476		)	(912		)

Effect of currency on cash	—			—			—			(15		)	—			(15		)
Total increase (decrease) in cash	(1		)	(159		)	(5		)	(313		)	—			(478		)
Cash at the beginning of the period	1			173			13			594			—			781
Cash at the end of the period	$	—		$	14		$	8		$	281		$	—		$	303

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ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).

COMPANY OVERVIEW

Eaton Corporation plc (Eaton or the Company) is a power management company with 2015 net sales of $20.9 billion. The Company provides energy-efficient solutions that help its customers effectively manage electrical, hydraulic, and mechanical power more efficiently, safely, and sustainably. Eaton has approximately 96,000 employees in over 60 countries and sells products to customers in more than 175 countries.

Summary of Results of Operations

A summary of Eaton’s Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted follows:



	Three months ended June 30				Six months ended June 30
	2016		2015		2016		2015
Net sales	$	5,080	$	5,372	$	9,893	$	10,595
Net income attributable to Eaton ordinary shareholders	491		535		895		1,001
Net income per share attributable to Eaton ordinary shareholders - diluted	$	1.07	$	1.14	$	1.95	$	2.13

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

RESULTS OF OPERATIONS

Non-GAAP Financial Measures

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

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Consolidated Financial Results



	Three months ended June 30						Decrease		Six months ended June 30						Decrease
	2016			2015			Decrease		2016			2015			Decrease
Net sales	$	5,080		$	5,372		(5	)%	$	9,893		$	10,595		(7	)%
Gross profit	1,661			1,697			(2	)%	3,183			3,327			(4	)%
Percent of net sales	32.7		%	31.6		%			32.2		%	31.4		%
Income before income taxes	553			598			(8	)%	995			1,103			(10	)%
Net income	492			535			(8	)%	895			1,002			(11	)%
Less net income for noncontrolling interests	(1		)	—					—			(1		)
Net income attributable to Eaton ordinary shareholders	491			535			(8	)%	895			1,001			(11	)%
Excluding acquisition integration charges, after-tax (Note 3)	1			8					1			15
Operating earnings	$	492		$	543		(9	)%	$	896		$	1,016		(12	)%

Net income per share attributable to Eaton ordinary shareholders - diluted	$	1.07		$	1.14		(6	)%	$	1.95		$	2.13		(8	)%
Excluding per share impact of acquisition integration charges costs, after-tax (Note 3)	—			0.02					—			0.03
Operating earnings per ordinary share	$	1.07		$	1.16		(8	)%	$	1.95		$	2.16		(10	)%

Net Sales

Net sales decreased 5% in the second quarter of 2016 compared to the second quarter of 2015 due to a decrease of 4% in organic sales and a decrease of 1% from the impact of negative currency translation. Net sales decreased 7% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 5% in organic sales and a 2% decrease from the impact of negative currency translation. The decrease in organic sales in the second quarter and first six months of 2016 was primarily due to weakening demand in several of the Company's end markets.

Gross Profit

Gross profit margin increased from 31.6% in the second quarter of 2015 to 32.7% in the second quarter of 2016. Gross profit margin increased from 31.4% in the first six months of 2015 compared to 32.2% in the first six months of 2016. The increase in gross margin in the second quarter and first six months of 2016 was primarily due to cost savings from restructuring actions and other cost control measures, partially offset by lower volumes, unfavorable product mix, and higher restructuring charges.

Income Taxes

Operating Earnings

Operating earnings, a non-GAAP measure discussed above in Non-GAAP Financial Measures, of $492 in the second quarter of 2016 decreased 9% compared to Operating earnings of $543 in the second quarter of 2015. Operating earnings in the first six months of 2016 was $896, a decrease of 12% compared to $1,016 in the first six months of 2015. The decrease in Operating earnings in the second quarter and first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by savings from cost control measures and restructuring actions, as well as a decrease in pension and other postretirement benefits expense.

Operating earnings per ordinary share decreased to $1.07 in the second quarter of 2016 compared to $1.16 in the second quarter of 2015. Operating earnings per ordinary share decreased to $1.95 in the first six months of 2016 compared to $2.16 in the first six months of 2015. The decrease in Operating earnings per ordinary share in the second quarter and first six months of 2016 was due to lower Operating earnings, partially offset by the impact of the Company's share repurchases over the past year.

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Business Segment Results of Operations

The following is a discussion of Net sales, operating profit and operating margin by business segment, which includes a discussion of operating profit and operating profit margin before acquisition integration charges. For additional information related to acquisition integration charges, see Note 3 to the Condensed Consolidated Financial Statements.

Electrical Products



	Three months ended June 30						Increase		Six months ended June 30						Increase
	2016			2015			Increase		2016			2015			Increase
Net sales	$	1,784		$	1,784		—	%	$	3,464		$	3,475		—	%

Operating profit	$	322		$	276		17	%	$	593		$	536		11	%
Operating margin	18.0		%	15.5		%			17.1		%	15.4		%

Acquisition integration charges	$	1		$	6				$	1		$	12

Before acquisition integration charges
Operating profit	$	323		$	282		15	%	$	594		$	548		8	%
Operating margin	18.1		%	15.8		%			17.1		%	15.8		%

Net sales were broadly flat in the second quarter and first six months of 2016 compared to the second quarter and first six months of 2015, with an increase of 1% in organic sales offset by a decrease of 1% from the impact of negative currency translation in both periods. By region, organic sales grew in the Americas, Europe and Middle East, while sales declined in Asia Pacific.

Operating margin before acquisition integration charges increased from 15.8% in the second quarter of 2015 to 18.1% in the second quarter of 2016. Operating margin before acquisition integration charges increased from 15.8% in the first six months of 2015 to 17.1% in first six months of 2016. The increase in operating margin in the second quarter and first six months of 2016 compared to the second quarter and first six months of 2015 was due to savings from restructuring actions and other cost control measures, partially offset by higher restructuring charges and unfavorable product mix.

Electrical Systems and Services



	Three months ended June 30						Decrease		Six months ended June 30						Decrease
	2016			2015			Decrease		2016			2015			Decrease
Net sales	$	1,429		$	1,502		(5	)%	$	2,771		$	2,950		(6	)%

Operating profit	$	178		$	223		(20	)%	$	337		$	409		(18	)%
Operating margin	12.5		%	14.8		%			12.2		%	13.9		%

Acquisition integration charges	$	—		$	4				$	1		$	7

Before acquisition integration charges
Operating profit	$	178		$	227		(22	)%	$	338		$	416		(19	)%
Operating margin	12.5		%	15.1		%			12.2		%	14.1		%

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

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

Hydraulics



	Three months ended June 30						Decrease		Six months ended June 30						Decrease
	2016			2015			Decrease		2016			2015			Decrease
Net sales	$	589		$	643		(8	)%	$	1,140		$	1,308		(13	)%

Operating profit	$	59		$	74		(20	)%	$	100		$	140		(29	)%
Operating margin	10.0		%	11.5		%			8.8		%	10.7		%

Acquisition integration charges	$	—		$	1				$	—		$	2

Before acquisition integration charges
Operating profit	$	59		$	75		(21	)%	$	100		$	142		(30	)%
Operating margin	10.0		%	11.7		%			8.8		%	10.9		%

Net sales decreased 8% in the second quarter of 2016 compared to the second quarter of 2015 due to a decrease of 7% in organic sales and a decrease of 1% from the impact of negative currency translation. Net sales decreased 13% for the first six months of 2016 compared to the first six months of 2015 due to a decrease of 11% in organic sales and a decrease of 2% from the impact of negative currency translation. The decline in organic sales in the second quarter and first six months of 2016 were primarily due to continued weakness in both the mobile and industrial markets.

Operating margin before acquisition integration charges decreased from 11.7% in the second quarter of 2015 to 10.0% in the second quarter of 2016. Operating margin before acquisition integration charges decreased from 10.9% in the first six months of 2015 to 8.8% in the first six months of 2016. The decrease in operating margin in the second quarter and first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by savings from restructuring actions and other cost control measures.

Aerospace



	Three months ended June 30						Increase (decrease)		Six months ended June 30						Increase (decrease)
	2016			2015			Increase (decrease)		2016			2015			Increase (decrease)
Net sales	$	447		$	454		(2	)%	$	892		$	918		(3	)%

Operating profit	$	83		$	77		8	%	$	163		$	154		6	%
Operating margin	18.6		%	17.0		%			18.3		%	16.8		%

Net sales in the second quarter of 2016 decreased 2% compared to the second quarter of 2015 due to a 2% impact from negative currency translation. Net sales decreased 3% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 2% in organic sales and a decrease of 1% from the impact of negative currency translation. The decline in organic sales in the first six months of 2016 primarily related to a decrease in military OEM markets, partially offset by growth in commercial markets.

Operating margin increased in the second quarter from 17.0% in 2015 to 18.6% in 2016, and in the first six months from 16.8% in 2015 to 18.3% in 2016. The increase in operating margin in the second quarter and first half of 2016 was due to savings from restructuring actions and reduced program development spending.

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Vehicle



	Three months ended June 30						Decrease		Six months ended June 30						Decrease
	2016			2015			Decrease		2016			2015			Decrease
Net sales	$	831		$	989		(16	)%	$	1,626		$	1,944		(16	)%

Operating profit	$	137		$	190		(28	)%	$	255		$	354		(28	)%
Operating margin	16.5		%	19.2		%			15.7		%	18.2		%

Net sales decreased 16% in the second quarter of 2016 compared to the second quarter of 2015 due to a 14% decline in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 16% in the first six months of 2016 compared to the first six months of 2015 due to a decrease of 13% in organic sales and a decrease of 3% from the impact of negative currency translation. The change in organic sales in the second quarter and first six months of 2016 was primarily due to lower truck markets in the Americas, partially offset by growth in the European automotive market.

Operating margin decreased from 19.2% in the second quarter of 2015 to 16.5% in the second quarter of 2016. The decrease in the second quarter of 2016 was primarily the result of lower sales volumes partially offset by manufacturing efficiencies and cost savings from restructuring actions and other cost control measures. Operating margin decreased from 18.2% in the first six months of 2015 to 15.7% in the first six months of 2016. The decrease in the first six months of 2016 was primarily due to lower sales volumes and higher restructuring charges, partially offset by manufacturing efficiencies and cost savings from restructuring actions.

Corporate Expense



	Three months ended June 30				Increase (decrease)		Six months ended June 30				Increase (decrease)
	2016		2015		Increase (decrease)		2016		2015		Increase (decrease)
Amortization of intangible assets	98		102		(4	)%	$	198	$	204	(3	)%
Interest expense - net	57		59		(3	)%	114		116		(2	)%
Pension and other postretirement benefits expense	13		33		(61	)%	27		61		(56	)%
Other corporate expense - net	58		48		21	%	114		109		5	%
Total corporate expense	$	226	$	242	(7	)%	$	453	$	490	(8	)%

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

LIQUIDITY, CAPITAL RESOURCES AND CHANGES IN FINANCIAL CONDITION

Financial Condition and Liquidity

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

Eaton was in compliance with each of its debt covenants for all periods presented.

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Sources and Uses of Cash

Operating Cash Flow

Net cash provided by operating activities was $1,116 in the first six months of 2016, an increase of $460 in the source of cash compared to $656 in the first six months of 2015. The increase in net cash provided by operating activities in the first six months of 2016 was driven by lower pension contributions and lower working capital balances compared to the first six months of 2015.

Investing Cash Flow

Net cash used in investing activities was $204 in the first six months of 2016, a decrease of $3 in the use of cash compared to $207 in the first six months of 2015. The slight decrease was primarily driven by no business acquisitions completed in 2016 offset by lower sales of short-term investments.

Financing Cash Flow

Net cash used in financing activities was $865 in the first six months of 2016, a decrease of $47 in the use of cash compared to $912 in the first six months of 2015. The decrease in the use of cash was due to $164 less in payments on borrowings, which totaled $240 in 2016 and $404 in 2015. This was partially offset by an increase of $125 in share repurchases during the first six months of 2016 compared to the first six months of 2015.

FORWARD-LOOKING STATEMENTS

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


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

There have been no material changes in exposures to market risk since December 31, 2015.


ITEM 4.	CONTROLS AND PROCEDURES.

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

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Disclosure controls and procedures are designed to ensure that information required to be disclosed in Eaton’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Eaton’s reports filed under the Exchange Act is accumulated and communicated to management, including Eaton’s Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosure.

During the second quarter of 2016, there was no change in Eaton's internal control over financial reporting that materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS.

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


ITEM 1A.	RISK FACTORS.

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


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

During the second quarter of 2016, 3.7 million ordinary shares were repurchased in the open market at a total cost of $224. These shares were repurchased under the program approved by the Board on February 24, 2016. A summary of the shares repurchased in the second quarter of 2016 follows:



Month	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Approximate dollar value of shares that may yet be purchased under the plans or programs (in millions)
April	580,423	$	63.03	580,423	$	2,445
May	1,684,538	$	62.60	1,684,538	$	2,340
June	1,451,314	$	56.76	1,451,314	$	2,258
Total	3,716,275	$	60.39	3,716,275


ITEM 6.	EXHIBITS.

Exhibits — See Exhibit Index attached.

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SIGNATURES

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



			EATON CORPORATION plc
			Registrant

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

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Eaton Corporation plc

Second Quarter 2016 Report on Form 10-Q

Exhibit Index



3 (i)		Certificate of Incorporation — Incorporated by reference to the Form S-8 filed November 30, 2012

3 (ii)		Articles of Association — Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2016

3 (iii)		Memorandum of Association — Incorporated by reference to the Form 10-Q Report for the three months ended March 31, 2016

4.1		Indenture dated as of November 20, 2012, among Turlock Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.1 of Eaton Corporation plc's Form 8-K Current Report filed on November 26, 2012 (Commission File No. 333-182303))

4.2		Supplemental Indenture No. 1, dated as of November 30, 2012, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 of the registrant's Form S-4 filed on September 16, 2013)

4.3		Supplemental Indenture No. 2, dated as of January 8, 2013, among Eaton Corporation, the guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference Exhibit 4.3 of the registrant's Form S-4 filed on September 16, 2013)

4.4		Pursuant to Regulation S-K Item 601(b)(4), Eaton agrees to furnish to the SEC, upon request, a copy of the instruments defining the rights of holders of its long-term debt other than those set forth in Exhibits 4.1-4.3 hereto

12		Ratio of Earnings to Fixed Charges — Filed in conjunction with this Form 10-Q Report *

31.1		Certification of Principal Executive Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *

31.2		Certification of Principal Financial Officer (Pursuant to Rule 13a-14(a)) — Filed in conjunction with this Form 10-Q Report *

32.1		Certification of Principal Executive Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *

32.2		Certification of Principal Financial Officer (Pursuant to Rule 13a-14(b) as adopted pursuant to Section 906 of the Sarbanes-Oxley Act) — Filed in conjunction with this Form 10-Q Report *

101.INS		XBRL Instance Document *

101.SCH		XBRL Taxonomy Extension Schema Document *

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document *

101.DEF		XBRL Taxonomy Extension Label Definition Document *

101.LAB		XBRL Taxonomy Extension Label Linkbase Document *

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document *

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*		Submitted electronically herewith.

Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Statements of Income for the three months ended June 30, 2016 and 2015, (ii) Consolidated Statements of Comprehensive Income for the three months ended June 30, 2016 and 2015, (iii) Condensed Consolidated Balance Sheets at June 30, 2016 and December 31, 2015, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) Notes to Condensed Consolidated Financial Statements for the six months ended June 30, 2016.