Amounts are in millions of dollars or shares unless indicated otherwise (per share data assume dilution).
COMPANY OVERVIEWEaton Corporation plc (Eaton or the Company) is a power management company with 2019 net sales of$21.4 billion . Eaton's mission is to improve the quality of life and environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic, and mechanical power - more safely, more efficiently and more reliably. Eaton has approximately 93,000 employees in 61 countries and sells products to customers in more than 175 countries. Summary of Results of Operations A summary of Eaton's Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted follows: Three months ended Six months ended June 30 June 30 2020 2019 2020 2019 Net sales$ 3,856 $ 5,533 $ 8,645 $ 10,838 Net income attributable to Eaton ordinary shareholders 51 636 489 1,158 Net income per share attributable to Eaton ordinary shareholders - diluted$ 0.13 $ 1.50
Eaton has 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$187 in the second quarter of 2020. These restructuring activities are expected to incur additional expenses of$33 in the second half of 2020,$55 in 2021, and$5 in 2022, primarily comprised of plant closing 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 13. 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. Previously reported financial information for these reportable segments has been updated for 2019 in Note 14. The re-segmentation did not impact previously reported consolidated results of operations. OnFebruary 25, 2020 , Eaton acquiredPower 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 inRichmond, Virginia , and had 2019 sales of$125 .Power Distribution, Inc. is reported within the Electrical Americas business segment. OnMarch 2, 2020 , Eaton sold its Lighting business toSignify 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. OnJanuary 21, 2020 , Eaton entered into an agreement to sell its Hydraulics business toDanfoss 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$2.2 billion in 2019. The transaction is subject to customary closing conditions and regulatory approvals and is expected to close by the end of the first quarter of 2021. 27 -------------------------------------------------------------------------------- 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 ofDecember 31, 2019 andJune 30, 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 values. Depreciation and amortization expense is not recorded for the period in which Other long-lived assets are classified as held for sale. COVID-19 The Company continues to be impacted by the COVID-19 pandemic in the second quarter of 2020 seeing dramatic declines in several end markets. Organic sales were down 22% for the second quarter primarily due to the impact from the COVID-19 pandemic. The Company continues to monitor 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 the second quarter, the Company implemented the following actions: • Reduction of senior executive base salaries in the second quarter
• 50% reduction in cash retainer for non-employee members of the Board of
Directors in the second quarter
• Implementation of unpaid leave programs
• Eliminated 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, and so we have decided to implement a multi-year restructuring program discussed in Note 13 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 sites around the world in cleaning and disinfecting protocols
• Enacted social distancing procedures, staggered shifts, implemented 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 allwho may have been exposed
• Disinfecting work stations and common areas
• Shutting down the facility if warranted
These actions are aligned with our preventive health protocols and those of
governmental authorities and health organizations including the
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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
RESULTS OF OPERATIONS Non-GAAP Financial Measures The following discussion of Consolidated Financial Results includes certain non-GAAP financial measures. These financial measures include adjusted earnings and adjusted earnings per ordinary share, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of adjusted earnings and adjusted earnings per ordinary share to the most directly comparable GAAP measure is included in the table below, and excludes acquisition and divestiture expense related primarily to the planned divestiture of the Hydraulics business, the divestiture of the Lighting business, the acquisitions of Souriau-Sunbank and Ulusoy Elektrik, and other charges to exit businesses, and restructuring program expense discussed in Note 13. 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. Acquisition and Divestiture Charges Eaton incurs integration charges and transaction costs to acquired businesses, and transaction costs and other charges to divest and exit businesses. Eaton also recognizes gains and losses on the sale of businesses. A summary of these Corporate items follows: Three months ended Six months ended June 30 June 30 2020 2019 2020 2019 Acquisition integration, divestiture charges and transaction costs$ 103 $ 14 $ 235 $ 26 Gain on the sale of the Lighting business - - (221 ) - Total before income taxes 103 14 14 26 Income tax expense (benefit) (23 ) - 75 (1 ) Total after income taxes$ 80 $ 14 $ 89 $ 25 Per ordinary share - diluted$ 0.20 $ 0.03 $ 0.22 $ 0.06 Acquisition integration, divestiture charges and transaction costs in 2020 are primarily related to the planned divestiture of the Hydraulics business, the divestiture of the Lighting business, the acquisitions of Souriau-Sunbank and Ulusoy Elektrik, and other charges to exit businesses, and were included in Cost of products sold, Selling and administrative expense, Research and development expense, or Other expense (income) - net. Charges in 2019 related to the divestiture of the Lighting business and the acquisition of Ulusoy Elektrik, and were included in Selling and administrative expense. In Business Segment Information in Note 14, these charges were included in Other expense - net. 29
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Consolidated Financial Results
Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Net sales$ 3,856 $ 5,533 (30 )%$ 8,645 $ 10,838 (20 )% Gross profit 979 1,836 (47 )% 2,466 3,568 (31 )% Percent of net sales 25.4 % 33.2 % 28.5 % 32.9 % Income before income taxes 47 738 (94 )% 668 1,341 (50 )% Net income 54 636 (92 )% 492 1,158 (58 )% Less net income for noncontrolling interests (3 ) - (3 ) - Net income attributable to Eaton ordinary shareholders 51 636 (92 )% 489 1,158 (58 )% Excluding acquisition and divestiture charges, after-tax 80 14 89 25 Excluding restructuring program charges, after-tax 148 - 148 - Adjusted earnings$ 279 $ 650 (57 )%$ 726 $ 1,183 (39 )% Net income per share attributable to Eaton ordinary shareholders - diluted$ 0.13 $ 1.50 (91 )%$ 1.20 $ 2.73 (56 )% Excluding per share impact of acquisition and divestiture charges, after-tax 0.20 0.03 0.22 0.06 Excluding per share impact of restructuring program charges, after-tax 0.37 - 0.37 - Adjusted earnings per ordinary share$ 0.70 $ 1.53 (54 )%$ 1.79 $ 2.79 (36 )% Net Sales Net sales decreased 30% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 22% in organic sales, a decrease of 8% from divestitures of businesses, and a decrease of 2% from the impact of negative currency translation, partially offset by an increase of 2% from acquisitions of businesses. Net sales decreased 20% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 15% in organic sales, a decrease of 6% from divestitures of businesses, and a decrease of 1% from the impact of negative currency translation, partially offset by an increase of 2% from acquisitions of businesses. The decrease in organic sales in the second quarter and first six months of 2020 was primarily due to the impact from the COVID-19 pandemic, as well as lower sales volumes in all business segments. Gross Profit Gross profit margin decreased from 33.2% in the second quarter of 2019 to 25.4% in the second quarter of 2020, and from 32.9% in first six months of 2019 to 28.5% in first six months of 2020. The decrease in gross profit margin in the second quarter and first six months of 2020 was primarily due to lower sales volumes from the impact of the COVID-19 pandemic. 30
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Income Taxes The effective income tax rate for the second quarter of 2020 was a tax benefit of 15.1% compared to tax expense of 13.9% for the second quarter of 2019. The credit effective tax rate in the second quarter of 2020 was primarily due to the tax impact from the restructuring charges described in Note 13. The effective income tax rate for the first six months of 2020 was expense of 26.4% compared to expense of 13.7% for the first six months of 2019. The increase in the effective tax rate in the first six months of 2020 was primarily due to the tax impact on the gain from the sale of the Lighting business described in Note 2. Net Income Net income attributable to Eaton ordinary shareholders of$51 in the second quarter of 2020 decreased 92% compared to Net income attributable to Eaton ordinary shareholders of$636 in the second quarter of 2019. Net income attributable to Eaton ordinary shareholders of$489 in the first six months of 2020 decreased 58% compared to Net income attributable to Eaton ordinary shareholders of$1,158 in the first six months of 2019. Net income in the first six months of 2020 included an after-tax gain of$91 on the sale of the Lighting business discussed in Note 2. The decrease in the second quarter and first six months of 2020 was primarily due lower sales volumes from the impact of the COVID-19 pandemic. Net income per ordinary share decreased to$0.13 in the second quarter of 2020 compared to$1.50 in the second quarter of 2019. Net income per ordinary share decreased to$1.20 in the first six months of 2020 compared to$2.73 in the first six months of 2019. Net income per ordinary share in the first six months of 2020 included$0.22 from the sale of the Lighting business. The decrease in Net income per ordinary share in the second quarter and first six months of 2020 was due to lower net income, partially offset by the impact of the Company's share repurchases over the past year. Adjusted Earnings Adjusted earnings of$279 in the second quarter of 2020 decreased 57% compared to Adjusted earnings of$650 in the second quarter of 2019. Adjusted earnings of$726 in the first six months of 2020 decreased 39% compared to Adjusted earnings of$1,183 in the first six months of 2019. The decrease in Adjusted earnings in the second quarter and first six months of 2020 was primarily due to lower Net income attributable to Eaton ordinary shareholders, adjusted for higher restructuring program charges, and acquisition and divestiture charges. Adjusted earnings per ordinary share decreased to$0.70 in the second quarter of 2020 compared to$1.53 in the second quarter of 2019. Adjusted earnings per ordinary share decreased to$1.79 in the first six months of 2020 compared to$2.79 in the first six months of 2019. The decrease in Adjusted earnings per ordinary share in the second quarter and first six months of 2020 was due to lower Adjusted earnings, adjusted for the impact of the Company's share repurchases over the past year. 31
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Business Segment Results of Operations The following is a discussion of Net sales, operating profit and operating margin by business segment. ElectricalAmericas Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Net sales$ 1,490 $ 2,085 (29 )%$ 3,278 $ 4,046 (19 )% Operating profit$ 308 $ 404 (24 )%$ 616 $ 738 (17 )% Operating margin 20.7 % 19.4 % 18.8 % 18.2 % Net sales decreased 29% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 20% from the divestiture of the Lighting business, a decrease of 9% in organic sales, and a decrease of 1% from the impact of negative currency translation, partially offset by an increase of 1% from the acquisitions ofInnovative Switchgear Solutions, Inc. andPower Distribution, Inc. Net sales decreased 19% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 14% from the divestiture of the Lighting business, a decrease of 5% in organic sales, and a decrease of 1% from the impact of negative currency translation, partially offset by an increase of 1% from the acquisitions ofISG and Power Distribution, Inc. The decrease in organic sales in the second quarter and first six months of 2020 was primarily driven by the impact of the COVID-19 pandemic. The operating margin increased from 19.4% in the second quarter of 2019 to 20.7% in the second quarter of 2020 and from 18.2% in the first six months of 2019 to 18.8% in the first six months of 2020. The increase in operating margin was primarily due to the favorable impact from the divestiture of the Lighting business and cost containment actions to counteract the impact of the COVID-19 pandemic, partially offset by lower sales volumes. Electrical Global Three months ended Six months ended June 30 Increase June 30 2020 2019 (decrease) 2020 2019 Increase (decrease) Net sales$ 1,111 $ 1,324 (16 )%$ 2,255 $ 2,566 (12 )% Operating profit$ 178 $ 233 (24 )%$ 344 $ 423 (19 )% Operating margin 16.0 % 17.6 % 15.3 % 16.5 % Net sales decreased 16% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 14% in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 12% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 11% in organic sales and a decrease of 2% from the impact of negative currency translation, partially offset by an increase of 1% from the acquisition of Ulusoy Elektrik. The decrease in organic sales in the second quarter and first six months of 2020 was primarily driven by the impact of the COVID-19 pandemic, with particular weakness in global oil and gas markets and industrial applications. The operating margin decreased from 17.6% in the second quarter of 2019 to 16.0% in the second quarter of 2020 and from 16.5% in the first six months of 2019 to 15.3% in the first six months of 2020 primarily due to lower sales volumes, partially offset by cost containment actions to mitigate the impact of the COVID-19 pandemic. 32
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Table of Contents Hydraulics Three months ended Six months ended June 30 Increase June 30 2020 2019 (decrease) 2020 2019 Increase (decrease) Net sales$ 411 $ 603 (32 )%$ 918 $ 1,208 (24 )% Operating profit$ 37 $ 53 (30 )%$ 92 $ 112 (18 )% Operating margin 9.0 % 8.8 % 10.0 % 9.3 % Net sales decreased 32% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 30% in organic sales and a decrease of 2% from the impact of negative currency translation. Net sales decreased 24% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 22% in organic sales and a decrease of 2% from the impact of negative currency translation. The decrease in organic sales in the second quarter and first six months of 2020 was primarily due to weakness at both OEMs and distributors globally. The operating margin increased from 8.8% in the second quarter of 2019 to 9.0% in the second quarter of 2020 and from 9.3% in the first six months of 2019 to 10.0% in the first six months of 2020. The increase in operating margin was primarily due to depreciation expense no longer being charged as a result of the business being classified as held for sale as discussed in Note 2 and cost containment actions to counteract the impact of the COVID-19 pandemic, partially offset by lower sales volumes. Aerospace Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Net sales$ 461 $ 634 (27 )%$ 1,141 $ 1,238 (8 )% Operating profit$ 68 $ 155 (56 )%$ 215 $ 292 (26 )% Operating margin 14.8 % 24.4 % 18.8 % 23.6 % Net sales decreased 27% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 35% in organic sales, partially offset by an increase of 8% from the acquisition of Souriau-Sunbank Connection Technologies (Souriau-Sunbank). Net sales decreased 8% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 19% in organic sales, partially offset by an increase of 11% from the acquisition of Souriau-Sunbank. The decrease in organic sales in the second quarter and first six months of 2020 was primarily due to the impact of the COVID-19 pandemic on commercial aviation. The operating margin decreased from 24.4% in the second quarter of 2019 to 14.8% in second quarter of 2020 and from 23.6% in the first six months of 2019 to 18.8% in the first six months of 2020 primarily due to lower sales volumes and the acquisition of Souriau-Sunbank. 33
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Table of Contents Vehicle Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Net sales$ 327 $ 803 (59 )%$ 925 $ 1,613 (43 )% Operating profit (loss)$ (21 ) $ 136 (115 )%$ 60 $ 258 (77 )% Operating margin (6.4 )% 16.9 % 6.5 % 16.0 % Net sales decreased 59% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 52% in organic sales, a decrease of 4% from the divestiture of our Automotive Fluid Conveyance business, and a decrease of 3% from the impact of negative currency translation. Net sales decreased 43% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 36% in organic sales, a decrease of 4% from the divestiture of our Automotive Fluid Conveyance business, and a decrease of 3% from the impact of negative currency translation. The decrease in organic sales in the second quarter and first six months of 2020 was driven by plant shutdowns due to the COVID-19 pandemic, lower Class 8 OEM production, and continued weakness in light vehicle sales. The operating margin decreased from 16.9% in the second quarter of 2019 to negative 6.4% in the second quarter of 2020 and from 16.0% in the first six months of 2019 to 6.5% in the first six months of 2020 primarily due to lower sales volumes. eMobility Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Net sales$ 56 $ 84 (33 )%$ 128 $ 167 (23 )%
Operating profit (loss)
$ (1 ) $ 12 (108 )% Operating margin (3.6 )% 8.3 % (0.8 )% 7.2 % Net sales decreased 33% in the second quarter of 2020 compared to the second quarter of 2019 due to a decrease of 33% in organic sales. Net sales decreased 23% in the first six months of 2020 compared to the first six months of 2019 due to a decrease of 22% in organic sales and a decrease of 1% from the impact of negative currency translation. The decrease in organic sales in the second quarter and first six months of 2020 was primarily due to the impact from the COVID-19 pandemic, with particular weakness in legacy internal combustion engine platforms. The operating margin decreased from 8.3% in the second quarter of 2019 to negative 3.6% in the second quarter of 2020 and from 7.2% in the first six months of 2019 to negative 0.8% in the first six months of 2020 primarily due to lower sales volumes. 34
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Table of Contents Corporate Expense Three months ended Six months ended June 30 Increase June 30 Increase 2020 2019 (decrease) 2020 2019 (decrease) Amortization of intangible assets$ 88 $ 94 (6 )%$ 175 $ 187 (6 )% Interest expense - net 38 50 (24 )% 72 110 (35 )% Pension and other postretirement benefits expense 12 2 500 % 20 2 900 % Restructuring program charges 187 - NM 187 - NM Other expense - net 196 104 88 % 204 195 5 % Total corporate expense$ 521 $ 250 108 %$ 658 $ 494 33 % Total corporate expense was$521 in the second quarter of 2020 compared to Total corporate expense of$250 in the second quarter of 2019. Total corporate expense was$658 in the first six months of 2020 compared to Total corporate expense of$494 in the first six months of 2019. The increase in Total corporate expense for the second quarter and first six months of 2020 was primarily due to the multi-year restructuring program discussed in Note 13 and Other expense - net. The increase in Other expense - net is primarily due to higher acquisition and divestiture charges. The increase in the first six months is partially offset by a gain on sale of a business discussed in Note 2. 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$2,000 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 atJune 30, 2020 . Over the course of a year, cash, short-term investments and short-term debt may fluctuate in order to manage global liquidity. Eaton continues to be able to access commercial paper markets on the same basis as in prior periods. Although the COVID-19 pandemic negatively impacted second quarter results and we expect it may also have an unfavorable impact on third quarter results, our businesses continue to generate substantial cash. In addition, Eaton completed the$1.4 billion sale of our Lighting Business onMarch 2, 2020 and expects to complete the sale of our Hydraulics Business for$3.3 billion in cash by the end of the first quarter of 2021. Accordingly, Eaton believes it has the operating flexibility, cash flow, cash and short-term investment balances, and access to capital markets 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. Sources and Uses of Cash Operating Cash Flow Net cash provided by operating activities was$1,080 in the first six months of 2020, a decrease of$351 in the source of cash compared to$1,431 in the first six months of 2019. The decrease in net cash provided by operating activities in the first six months of 2020 was driven by lower net income, partially offset by lower working capital balances compared to 2019. Investing Cash Flow Net cash provided by investing activities was$900 in the first six months of 2020, an increase of$1,610 in the source of cash compared to net cash used of$710 in the first six months of 2019. The increase in the source of cash was primarily driven by proceeds from the sale of the Lighting business discussed in Note 2 and net sales of short-term investments of$4 in 2020 compared to to net purchases of$221 in 2019. Financing Cash Flow Net cash used in financing activities was$2,034 in the first six months of 2020, an increase of$1,435 in the use of cash compared to$599 in the first six months of 2019. The increase in the use of cash was primarily due to lower proceeds from borrowings of$4 in 2020 compared to$1,232 in 2019 and higher share repurchases of$1,300 in 2020 compared to$440 in 2019, partially offset by lower payments on borrowings of$125 in 2020 compared to$757 in 2019. 35
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Guaranteed Debt Issuers, Guarantors and Guarantor StructureEaton Corporation has issued senior notes pursuant to indentures datedApril 1, 1994 (the 1994 Indenture),November 20, 2012 (the 2012 Indenture) andSeptember 15, 2017 (the 2017 Indenture).Eaton Electric Holdings LLC , a subsidiary of Eaton, has issued senior notes pursuant to an indenture datedDecember 7, 2010 (the 2010 Indenture). These senior notes of bothEaton Corporation andEaton Electrical Holdings LLC are registered under the Securities Act of 1933, as amended (the Registered Senior Notes).Eaton Corporation is also the issuer of two outstanding series of privately placed debt securities (the PPNs), andEaton Capital Unlimited Company , another subsidiary of Eaton, is the issuer of three outstanding series of debt securities sold in offshore transactions under Regulation S promulgated under the Securities Act (the Eurobonds). The PPNs, the Eurobonds and the Registered Senior Notes (together, the Senior Notes) comprise substantially all of Eaton's long-term indebtedness. Substantially all of the Senior Notes, together with the credit facilities described above under Financial Condition and Liquidity (the Credit Facilities), are guaranteed by Eaton and 21 of its subsidiaries. Accordingly, they rank equally with each other. However, because these obligations are not secured, they would be effectively subordinated to any existing or future secured indebtedness of Eaton and its subsidiaries. As ofJune 30, 2020 , Eaton has no material, long-term secured debt. The guaranteed Registered Senior Notes are also structurally subordinated to the liabilities of Eaton's subsidiaries that are not guarantors. Except as described below under Future Guarantors, Eaton is not obligated to cause its subsidiaries to guarantee the Registered Senior Notes. The table set forth in Exhibit 22 filed with the Form 10-Q filed onApril 30, 2020 , details the primary obligors and guarantors with respect to the guaranteed Registered Senior Notes. Terms of Guarantees ofRegistered Securities Payment of principal and interest on the Registered Senior Notes is guaranteed, on an unsecured, unsubordinated basis by the subsidiaries of Eaton set forth in the table referenced in Exhibit 22. Each guarantee is full and unconditional, and joint and several. Each guarantor's guarantee is an unsecured obligation that ranks equally with all its other unsecured and unsubordinated indebtedness. The obligations of each guarantor under its guarantee of the Registered Senior Notes is subject to a customary savings clause or similar provision designed to prevent such guarantee from constituting a fraudulent conveyance or otherwise legally impermissible or voidable obligation. Generally, each guarantee of the Registered Senior Notes by a guarantor other than Eaton provides that it will be automatically and unconditionally released and discharged upon:
(a) the consummation of any transaction permitted under the applicable indenture
resulting in such guarantor ceasing to be a subsidiary, such as a sale to a
third party;
(b) such guarantee (so long as the guarantor is not obligated under any other
regulation or by any contractual obligation;
(c) such guarantee resulting in material adverse tax consequences to Eaton or any
of its subsidiaries (so long as the applicable guarantor is not obligated
under any other
(d) such guarantor becoming a controlled foreign corporation within the meaning
Section 957(a) of the Internal Revenue Code (a CFC), or an entity the material assets of which is limited to equity interests of a CFC.
Notwithstanding the foregoing, each guarantee by a direct or indirect parent of
The guarantee of Eaton does not contain any release provisions.
Notwithstanding the provisions above, the 2010 Indenture provides that certain legacy Cooper subsidiaries may only be released from the Senior Notes issued under the 2010 Indenture upon ceasing to be a subsidiary ofEaton Electrical Holdings LLC (other than by consolidation with, or merger into,Eaton Electric Holdings LLC or another subsidiary thereof) or by conveying substantially all of its properties and assets to a person other thanEaton Electric Holdings LLC or another subsidiary thereof. 36
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Future Guarantors The 2012 and 2017 Indentures generally provide that, with certain limited exceptions, any subsidiary of Eaton must become a guarantor if it becomes obligated as borrower or guarantor under any series of debt securities or a syndicated credit facility. Further, any entity that becomes a direct or indirect parent entity ofEaton Corporation and holds any material assets, with certain limited exceptions, or owes any material liabilities must become a guarantor. The 1994 Indenture and the 2010 Indenture do not contain provisions with respect to future guarantors. Summarized Financial Information of Guarantors and Issuers June 30, December 31, 2020 2019 Current assets $ 3,714 $ 4,082 Noncurrent assets 11,711 13,181 Current liabilities 3,017 2,703 Noncurrent liabilities 8,942 10,023 Amounts due to subsidiaries that are non-issuers and non-guarantors - net 20,701 37,050 Six months ended Year ended June 30 December 31 2020 2019 Net sales $ 5,028$ 12,961 Sales to subsidiaries that are non-issuers and non-guarantors 400 1,161 Cost of products sold 4,296 10,524 Expense from subsidiaries that are non-issuers and non-guarantors - net 290 734 Net loss (578 ) (90 ) The financial information presented is that ofEaton Corporation and the Guarantors, which includesEaton Corporation plc , on a combined basis and the financial information of non-issuer and non-guarantor subsidiaries has been excluded. Intercompany balances and transactions betweenEaton Corporation and Guarantors have been eliminated, and amounts due from, amounts due to, and transactions with non-issuer and non-guarantor subsidiaries have been presented separately. FORWARD-LOOKING STATEMENTS This Form 10-Q Report contains forward-looking statements concerning the anticipated completion of the divestiture of our Hydraulics business, anticipated additional charges and projected savings from restructuring actions, the future impact of COVID-19, the performance of our end markets and legal contingencies, 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 potential effects on our businesses from natural disasters; 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; 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; the course of the COVID-19 pandemic and government responses thereto, and unanticipated deterioration of economic and financial conditions inthe United States and around the world. Eaton does not assume any obligation to update these forward-looking statements. 37
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