EATON CORPORATION PLC COMPANY OVERVIEWEaton Corporation plc (Eaton or the Company) is a power management company with 2019 net sales of$21.4 billion . Eaton's mission is to improve the quality of life and environment through the use of power management technologies and services. We provide sustainable solutions that help our customers effectively manage electrical, hydraulic, and mechanical power - more safely, more efficiently and more reliably. Eaton has approximately 92,000 employees in 61 countries and sells products to customers in more than 175 countries. Summary of Results of Operations A summary of Eaton's Net sales, Net income attributable to Eaton ordinary shareholders, and Net income per share attributable to Eaton ordinary shareholders - diluted follows: Three months ended Nine months ended September 30 September 30 2020 2019 2020 2019 Net sales$ 4,526 $ 5,314 $ 13,171 $ 16,152 Net income attributable to Eaton ordinary shareholders 446 601 935 1,759
Net income per share attributable to Eaton ordinary shareholders - diluted
$ 1.11
In the second quarter of 2020, Eaton decided to undertake a multi-year restructuring program to reduce its cost structure and gain efficiencies in its business segments and at corporate in order to respond to declining market conditions. Restructuring charges incurred under this program for the three and nine months endedSeptember 30, 2020 , were$10 and$197 , respectively. These restructuring activities are expected to incur additional expenses of$18 in the fourth quarter of 2020,$60 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. 28 -------------------------------------------------------------------------------- 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 andSeptember 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 continued to be impacted by the COVID-19 pandemic in the third quarter of 2020. Organic sales were down 9% for the third quarter primarily due to the impact from the COVID-19 pandemic. The Company monitors the pandemic's impact throughout the world, including guidance from governmental authorities and world health organizations. Our businesses are focused on cost control to offset the volume declines. During the third quarter, the Company implemented the following actions: •Continued reduction of senior executive base salaries in the third quarter •25% reduction in cash retainer for non-employee members of the Board of Directors in the third quarter •Continued implementation of unpaid leave programs •Reduction of discretionary expenses and implementation of travel and hiring freezes •Elimination of nonessential capital spending We anticipate that several of our markets will take some time to recover. Therefore in the second quarter of 2020, we decided to undertake a multi-year restructuring program discussed in Note 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 employees at 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 theCenters for Disease Control (U.S.) and the World Health Organization . 29 -------------------------------------------------------------------------------- Table of Contents 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,Ulusoy Elektrik and Innovative Switchgear Solutions, Inc. (ISG), 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 acquire 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 Nine months ended September 30 September 30 2020 2019 2020 2019 Acquisition integration, divestiture charges, and transaction costs$ 28 $ 39 $ 263 $ 65 Gain on the sale of the Lighting business - - (221) - Total before income taxes 28 39 42 65 Income tax expense (benefit) (7) (4) 68 (5) Total after income taxes$ 21 $ 35 $ 110 $ 60 Per ordinary share - diluted$ 0.05 $ 0.08 $ 0.27 $ 0.14 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, the acquisitions of Ulusoy Elektrik and ISG, and other charges to exit businesses, and were included in Cost of products sold, Selling and administrative expense, Research and development expense, and Other expense (income) - net. In Business Segment Information in Note 14, these charges were included in Other expense - net. 30
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