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 as part of a hedging relationship, is effective and 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 $2,711 million and $2,880 million at December 31, 2022 and 2021, respectively. See Note 8 for additional information about debt.

Eaton enters 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 enters into forward starting floating-to-fixed interest rate swaps to manage interest rate risk on future anticipated debt issuances.


(In millions)	Notional amount		Other current assets		Other noncurrent assets		Other current liabilities		Other noncurrent liabilities		Type of hedge	Term
December 31, 2022
Derivatives designated as hedges


Currency exchange contracts	$	1,240	$	35	$	2	$	17	$	9	Cash flow	1 to 36 months
Commodity contracts	64		4		—		2		—		Cash flow	1 to 12 months
Total			$	39	$	2	$	19	$	9

Derivatives not designated as hedges
Currency exchange contracts	$	4,683	$	30			$	14				1 to 12 months















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

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.

Commodity

December 31, 2022

Term

Aluminum

Millions of pounds

1 to 12 months

Copper

Millions of pounds

1 to 12 months

Gold

1,604

Troy ounces

1 to 12 months

Silver

699,932

Troy ounces

1 to 12 months


(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, 2022		December 31, 2021			December 31, 2022		December 31, 2021
Long-term debt	$	(713)	$	(2,413)		$	(48)	$	(84)

(a) At December 31, 2022 and 2021, these amounts include the cumulative liability amount of fair value hedging adjustments remaining for which the hedge accounting has been discontinued of $48 million and $33 million, respectively.


	2022
(In millions)	Net sales		Cost of products sold		Interest expense - net
Amounts from Consolidated Statements of Income	$	20,752	$	13,865	$	144

Gain (loss) on derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps
Hedged item	$	—	$	—	$	(4)
Derivative designated as hedging instrument	—		—		4


Currency exchange contracts
Hedged item	$	17	$	(26)	$	—
Derivative designated as hedging instrument	(17)		26		—


Commodity contracts

Hedged item	$	—	$	4	$	—
Derivative designated as hedging instrument	—		(4)		—

Gain (loss) on derivatives designated as fair value hedges
Fixed-to-floating interest rate swaps
Hedged item	$	—	$	—	$	8
Derivative designated as hedging instrument	—		—		(8)


	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


	Gain (loss) recognized in Consolidated Statements of Income						Consolidated Statements of Income classification
(In millions)	2022		2021		2020
Gain (loss) on derivatives not designated as hedges
Currency exchange contracts	$	(56)	$	—	$	72	Interest expense - net
Commodity contracts	(15)		11		4		Other expense (income) - net and Cost of products sold (a)
Total	$	(71)	$	11	$	76

(a) In 2022, Eaton changed the presentation of gains and losses associated with derivative contracts for commodities that are not designated as hedges from Cost of product sold to Other expense (income) - net on the Consolidated Statements of Income. Prior period amounts have not been reclassified as they are not material.


	Gain (loss) recognized in other comprehensive (loss) income
(In millions)	2022		2021		2020
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	202	$	50	$	(52)

Currency exchange contracts	13		(6)		(13)
Commodity contracts	(5)		6		5
Non-derivative designated as net investment hedges
Foreign currency denominated debt	171		240		(173)
Total	$	381	$	290	$	(233)


	Location of gain (loss) reclassified from Accumulated other comprehensive loss	Gain (loss) reclassified from Accumulated other comprehensive loss
(In millions)		2022		2021		2020
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	Interest expense - net	$	4	$	—	$	—

Currency exchange contracts	Net sales and Cost of products sold	9		(6)		(18)
Commodity contracts	Cost of products sold	(4)		9		1
Non-derivative designated as net investment hedges
Foreign currency denominated debt	Interest expense - net	—		—		—
Total		$	9	$	3	$	(17)

At December 31, 2022, a gain of $19 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.