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DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | 12 Months Ended
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Dec. 31, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES | DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES In the normal course of business, Eaton is exposed to certain risks related to fluctuations in interest rates, currency exchange rates and commodity prices. The Company uses various derivative and non-derivative financial instruments, primarily interest rate swaps, currency forward exchange contracts, currency swaps and, commodity contracts to manage risks from these market fluctuations. The instruments used by Eaton are straightforward, non-leveraged instruments. The counterparties to these instruments are financial institutions with strong credit ratings. Eaton maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. Such instruments are not purchased and sold for trading purposes. Derivative financial instruments are accounted for at fair value and recognized as assets or liabilities in the Consolidated Balance Sheets. Accounting for the gain or loss resulting from the change in the fair value of the derivative financial instrument depends on whether it has been designated, and is effective, as part of a hedging relationship and, if so, as to the nature of the hedging activity. Eaton formally documents all relationships between derivative financial instruments accounted for as designated hedges and the hedged item, as well as its risk-management objective and strategy for undertaking the hedge transaction. This process includes linking derivative financial instruments to a recognized asset or liability, specific firm commitment, forecasted transaction, or net investment in a foreign operation. These financial instruments can be designated as: •Hedges of the change in the fair value of a recognized fixed-rate asset or liability, or the firm commitment to acquire such an asset or liability (a fair value hedge); for these hedges, the gain or loss from the derivative financial instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, are recognized in income during the period of change in fair value. •Hedges of the variable cash flows of a recognized variable-rate asset or liability, or the forecasted acquisition of such an asset or liability (a cash flow hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss on the hedged item is included in income. •Hedges of the currency exposure related to a net investment in a foreign operation (a net investment hedge); for these hedges, the gain or loss from the derivative financial instrument is recognized in Accumulated other comprehensive income and reclassified to income in the same period when the gain or loss related to the net investment in the foreign operation is included in income. The gain or loss from a derivative financial instrument designated as a hedge is classified in the same line of the Consolidated Statements of Income as the offsetting loss or gain on the hedged item. The cash flows resulting from these financial instruments are classified in operating activities on the Consolidated Statements of Cash Flows. For derivatives that are not designated as a hedge, any gain or loss is immediately recognized in income. The majority of derivatives used in this manner relate to risks resulting from assets or liabilities denominated in a foreign currency and certain commodity contracts that arise in the normal course of business. Eaton uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against foreign currency exposure (net investment hedges). Foreign currency denominated debt designated as non-derivative net investment hedging instruments had a carrying value on an after-tax basis of $2,880 million and $2,020 million at December 31, 2021 and 2020, respectively. See Note 8 for additional information about debt. Interest Rate Risk Eaton has entered into fixed-to-floating interest rate swaps to manage interest rate risk of certain long-term debt. These interest rate swaps are accounted for as fair value hedges of certain long-term debt. The maturity of the swap corresponds with the maturity of the debt instrument as noted in the table of long-term debt in Note 8. Eaton also entered into several forward starting floating-to-fixed interest rate swaps to manage interest rate risk on a future anticipated debt issuance. A summary of interest rate swaps outstanding at December 31, 2021, is as follows: Fixed-to-Floating Interest Rate Swaps
(Notional amount in millions)
Notional amount |  | Fixed interest rate received |  | Floating interest rate paid |  | Basis for contracted floating interest rate paid
$ | 100 |  |  | 8.10% |  | 6.00% |  | 1 month LIBOR + 5.90%
1,400 |  |  | 2.75% |  | 0.69% |  | 1 month LIBOR + 0.58%
200 |  |  | 3.68% |  | 1.17% |  | 1 month LIBOR + 1.07%
25 |  |  | 7.63% |  | 2.66% |  | 6 month LIBOR + 2.48%
50 |  |  | 7.65% |  | 2.77% |  | 6 month LIBOR + 2.57%
25 |  |  | 5.45% |  | 0.46% |  | 6 month LIBOR + 0.28%
Forward Starting Floating-to-Fixed Interest Rate Swaps
(Notional amount in millions)
Notional amount |  | Floating interest rate to be received |  | Fixed interest rate to be paid |  | Basis for contracted floating interest rate received
$ | 50 |  |  | —% |  | 3.10% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 3.06% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.80% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.81% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.64% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.64% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.30% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 2.08% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.77% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.51% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.50% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.20% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.14% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 0.81% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.24% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.31% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 0.71% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 0.78% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.79% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.76% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.75% |  | 3 month LIBOR + 0.00%
100 |  |  | —% |  | 1.83% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.65% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.56% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.66% |  | 3 month LIBOR + 0.00%
50 |  |  | —% |  | 1.69% |  | 3 month LIBOR + 0.00%
Derivative Financial Statement Impacts The fair value of derivative financial instruments recognized in the Consolidated Balance Sheets is as follows:
(In millions) | Notional amount |  | Other current assets |  | Other noncurrent assets |  | Other current liabilities |  | Other noncurrent liabilities |  | Type of hedge |  | Term
December 31, 2021 |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as hedges |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-to-floating interest rate swaps | $ | 1,800 |  |  | $ | 22 |  |  | $ | 29 |  |  | $ | — |  |  | $ | — |  |  | Fair value |  | 8 months to 13 years
Forward starting floating-to-fixed interest rate swaps | 1,350 |  |  | — |  |  | 38 |  |  | — |  |  | 79 |  |  | Cash flow |  | 11 to 31 years
Currency exchange contracts | 1,212 |  |  | 17 |  |  | 2 |  |  | 11 |  |  | 3 |  |  | Cash flow |  | 1 to 36 months
Commodity contracts | 50 |  |  | 2 |  |  | — |  |  | 1 |  |  | — |  |  | Cash flow |  | 1 to 12 months
Total |  |  | $ | 41 |  |  | $ | 69 |  |  | $ | 12 |  |  | $ | 82 |  |  |  |  |
Derivatives not designated as hedges |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts | $ | 5,285 |  |  | $ | 34 |  |  |  |  | $ | 9 |  |  |  |  |  |  | 1 to 12 months
Commodity contracts | 62 |  |  | 1 |  |  |  |  | 1 |  |  |  |  |  |  | 1 month
Total |  |  | $ | 35 |  |  |  |  | $ | 10 |  |  |  |  |  |  |
December 31, 2020 |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives designated as hedges |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed-to-floating interest rate swaps | $ | 2,075 |  |  | $ | 2 |  |  | $ | 100 |  |  | $ | — |  |  | $ | — |  |  | Fair value |  | 6 months to 14 years
Forward starting floating-to-fixed interest rate swaps | 900 |  |  | — |  |  | 17 |  |  | — |  |  | 108 |  |  | Cash flow |  | 12 to 32 years
Currency exchange contracts | 946 |  |  | 20 |  |  | 6 |  |  | 20 |  |  | 1 |  |  | Cash flow |  | 1 to 36 months
Commodity contracts | 24 |  |  | 4 |  |  | — |  |  | — |  |  | — |  |  | Cash flow |  | 1 to 12 months
Total |  |  | $ | 26 |  |  | $ | 123 |  |  | $ | 20 |  |  | $ | 109 |  |  |  |  |
Derivatives not designated as hedges |  |  |  |  |  |  |  |  |  |  |  |  |
Currency exchange contracts | $ | 5,227 |  |  | $ | 43 |  |  |  |  | $ | 34 |  |  |  |  |  |  | 1 to 12 months
Commodity contracts | 18 |  |  | 2 |  |  |  |  | — |  |  |  |  |  |  | 1 month
Total |  |  | $ | 45 |  |  |  |  | $ | 34 |  |  |  |  |  |  |
The currency exchange contracts shown in the table above as derivatives not designated as hedges are primarily contracts entered into to manage currency volatility or exposure on intercompany receivables, payables and loans. While Eaton does not elect hedge accounting treatment for these derivatives, Eaton targets managing 100% of the intercompany balance sheet exposure to minimize the effect of currency volatility related to the movement of goods and services in the normal course of its operations. This activity represents the great majority of these currency exchange contracts. The cash flows resulting from the settlement of these derivatives have been classified in investing activities in the Consolidated Statement of Cash Flows. As of December 31, 2021, the volume of outstanding commodity contracts that were entered into to hedge forecasted transactions:
Commodity |  | December 31, 2021 |  |  |  | Term
Copper |  | 9 |  |  | Millions of pounds |  | 1 to 12 months
Gold |  | 1,402 |  |  | Troy ounces |  | 1 to 12 months
Silver |  | 412,300 |  |  | Troy ounces |  | 1 to 12 months
The following amounts were recorded on the Consolidated Balance Sheets related to fixed-to-floating interest rate swaps:
(In millions) | Carrying amount of the hedged assets (liabilities) |  | Cumulative amount of fair value hedging adjustment included in the carrying amount of the hedged asset (liabilities) (a)
Location on Consolidated Balance Sheets | December 31, 2021 |  |  | December 31, 2020 |  | December 31, 2021 |  | December 31, 2020 |
Long-term debt | $ | (2,413) |  |  |  | $ | (2,688) |  |  | $ | (84) |  |  | $ | (139) |  |
(a) At December 31, 2021 and 2020, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $33 million and $37 million, respectively. The impact of hedging activities to the Consolidated Statements of Income is as follows:
| 2021 |  |
(In millions) | Net sales |  | Cost of products sold |  | Interest expense - net |  |
Amounts from Consolidated Statements of Income | $ | 19,628 |  |  | $ | 13,293 |  |  | $ | 144 |  |  |
Gain (loss) on derivatives designated as cash flow hedges |  |  |  |  |  |  |
Currency exchange contracts |  |  |  |  |  |  |
Hedged item | $ | 6 |  |  | $ | — |  |  | $ | — |  |  |
Derivative designated as hedging instrument | (6) |  |  | — |  |  | — |  |  |
Commodity contracts |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | (9) |  |  | $ | — |  |  |
Derivative designated as hedging instrument | — |  |  | 9 |  |  | — |  |  |
Gain (loss) on derivatives designated as fair value hedges |  |  |  |  |  |  |
Fixed-to-floating interest rate swaps |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | — |  |  | $ | 51 |  |  |
Derivative designated as hedging instrument | — |  |  | — |  |  | (51) |  |  |
| 2020 |  |
(In millions) | Net sales |  | Cost of products sold |  | Interest expense - net |  |
Amounts from Consolidated Statements of Income | $ | 17,858 |  |  | $ | 12,408 |  |  | $ | 149 |  |  |
Gain (loss) on derivatives designated as cash flow hedges |  |  |  |  |  |  |
Currency exchange contracts |  |  |  |  |  |  |
Hedged item | $ | 13 |  |  | $ | 5 |  |  | $ | — |  |  |
Derivative designated as hedging instrument | (13) |  |  | (5) |  |  | — |  |  |
Commodity contracts |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | (1) |  |  | $ | — |  |  |
Derivative designated as hedging instrument | — |  |  | 1 |  |  | — |  |  |
Gain (loss) on derivatives designated as fair value hedges |  |  |  |  |  |  |
Fixed-to-floating interest rate swaps |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | — |  |  | $ | (45) |  |  |
Derivative designated as hedging instrument | — |  |  | — |  |  | 45 |  |  |
| 2019 |  |
(In millions) | Net sales |  | Cost of products sold |  | Interest expense - net |  |
Amounts from Consolidated Statements of Income | $ | 21,390 |  |  | $ | 14,338 |  |  | $ | 199 |  |  |
Gain (loss) on derivatives designated as cash flow hedges |  |  |  |  |  |  |
Currency exchange contracts |  |  |  |  |  |  |
Hedged item | $ | 7 |  |  | $ | (12) |  |  | $ | — |  |  |
Derivative designated as hedging instrument | (7) |  |  | 12 |  |  | — |  |  |
Commodity contracts |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | — |  |  | $ | — |  |  |
Derivative designated as hedging instrument | — |  |  | — |  |  | — |  |  |
Gain (loss) on derivatives designated as fair value hedges |  |  |  |  |  |  |
Fixed-to-floating interest rate swaps |  |  |  |  |  |  |
Hedged item | $ | — |  |  | $ | — |  |  | $ | (62) |  |  |
Derivative designated as hedging instrument | — |  |  | — |  |  | 62 |  |  |
The impact of derivatives not designated as hedges to the Consolidated Statements of Income is as follows:
| Gain (loss) recognized in Consolidated Statements of Income |  |  |  | Consolidated Statements of Income classification
(In millions) | 2021 |  | 2020 |  | 2019 |  |  |  |
Gain (loss) on derivatives not designated as hedges |  |  |  |  |  |  |  |  |
Currency exchange contracts | $ | — |  |  | $ | 72 |  |  | $ | 73 |  |  |  |  | Interest expense - net
Commodity Contracts | 11 |  |  | 4 |  |  | — |  |  |  |  | Cost of products sold
Total | $ | 11 |  |  | $ | 76 |  |  | $ | 73 |  |  |  |  |
The impact of derivative and non-derivative instruments designated as hedges to the Consolidated Statements of Income and Comprehensive Income is as follows:
| Gain (loss) recognized in other comprehensive (loss) income
(In millions) | 2021 |  | 2020 |  | 2019
Derivatives designated as cash flow hedges |  |  |  |  |
Forward starting floating-to-fixed interest rate swaps | $ | 50 |  |  | $ | (52) |  |  | $ | (36) |
Currency exchange contracts | (6) |  |  | (13) |  |  | 3 |
Commodity contracts | 6 |  |  | 5 |  |  | — |
Non-derivative designated as net investment hedges |  |  |  |  |
Foreign currency denominated debt | 240 |  |  | (173) |  |  | 15 |
Total | $ | 290 |  |  | $ | (233) |  |  | $ | (18) |
| Location of gain (loss) reclassified from Accumulated other comprehensive loss |  | Gain (loss) reclassified from Accumulated other comprehensive loss
(In millions) |  |  | 2021 |  | 2020 |  | 2019
Derivatives designated as cash flow hedges |  |  |  |  |  |  |
Forward starting floating-to-fixed interest rate swaps | Interest expense - net |  | $ | — |  |  | $ | — |  |  | $ | — |
Currency exchange contracts | Net sales and Cost of products sold |  | (6) |  |  | (18) |  |  | 5 |
Commodity contracts | Cost of products sold |  | 9 |  |  | 1 |  |  | — |
Non-derivative designated as net investment hedges |  |  |  |  |  |  |
Foreign currency denominated debt | Interest expense - net |  | — |  |  | — |  |  | — |
Total |  |  | $ | 3 |  |  | $ | (17) |  |  | $ | 5 |
At December 31, 2021, a gain of $8 million of estimated unrealized net gains or losses associated with our cash flow hedges were expected to be reclassified to income from Accumulated other comprehensive loss within the next twelve months. These reclassifications relate to our designated foreign currency and commodity hedges that will mature in the next 12 months.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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