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 Condensed 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 currency exchange contracts, cross-currency interest rate swaps, and 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). The Company uses the spot rate method to assess hedge effectiveness when derivative financial instruments are used in net investment hedges. Under this method, changes in the fair value of currency exchange contracts attributable to changes in the spot exchange rate and changes in the fair value of cross-currency interest rate swaps are recognized in Accumulated other comprehensive loss. Changes related to the forward rate of currency exchange contracts are excluded from the hedging relationship and the forward points are amortized to Interest expense - net on a straight-line basis over the term of the contract. Interest accruals on cross-currency interest rate swaps are excluded from the hedging relationship and recognized in Interest expense - net. The cash flows resulting from currency exchange contracts and cross-currency interest rate swaps are classified in investing activities on the Condensed Consolidated Statements of Cash Flows.

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
March 31, 2025
Derivatives designated as hedges

Forward starting floating-to-fixed interest rate swaps	$	162	$	—	$	3	$	—	$	—	Cash flow	10 years
Currency exchange contracts	455		10		—		4		—		Cash flow	1 to 11 months
Commodity contracts	4		1		—		—		—		Cash flow	1 to 10 months
Currency exchange contracts	647		—		—		1		—		Net investment	3 months
Cross-currency interest rate swaps	523		—		—		—		9		Net investment	5 years
Total			$	10	$	3	$	5	$	9

Derivatives not designated as hedges
Currency exchange contracts	$	3,630	$	16			$	14				1 to 7 months




December 31, 2024
Derivatives designated as hedges
Forward starting floating-to-fixed interest rate swaps	$	156	$	—	$	—	$	—	$	1	Cash flow	11 years
Currency exchange contracts	499		12		—		14		—		Cash flow	1 to 13 months
Commodity contracts	4		—		—		—		—		Cash flow	1 to 11 months
Currency exchange contracts	545		3		—		—		—		Net investment	3 months
Total			$	15	$	—	$	14	$	1

Derivatives not designated as hedges
Currency exchange contracts	$	4,945	$	13			$	29				1 to 7 months

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 95% to 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 Condensed Consolidated Statements of Cash Flows.


(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)1
Location on Consolidated Balance Sheets	March 31, 2025		December 31, 2024			March 31, 2025		December 31, 2024
Long-term debt	$	(647)	$	(647)		$	(35)	$	(37)


	Three months ended March 31, 2025
(In millions)	Net Sales		Cost of products sold		Interest expense - net
Amounts from Consolidated Statements of Income	$	6,377	$	3,930	$	33

Gain (loss) on derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps
Hedged item	$	—	$	—	$	(3)
Derivative designated as hedging instrument	—		—		3

Currency exchange contracts
Hedged item	$	2	$	6	$	—
Derivative designated as hedging instrument	(2)		(6)		—






Gain (loss) on derivatives designated as net investment hedges
Cross-currency interest rate swaps
Initial value of component excluded from effectiveness testing amortized to earnings	$	—	$	—	$	1


	Three months ended March 31, 2024
(In millions)	Net Sales		Cost of products sold		Interest expense - net
Amounts from Consolidated Statements of Income	$	5,943	$	3,725	$	30

Gain (loss) on derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps
Hedged item	$	—	$	—	$	(3)
Derivative designated as hedging instrument	—		—		3

Currency exchange contracts
Hedged item	$	(1)	$	(7)	$	—
Derivative designated as hedging instrument	1		7		—


Commodity contracts
Hedged item	$	—	$	1	$	—
Derivative designated as hedging instrument	—		(1)		—


	Gain (loss) recognized in Consolidated Statements of Income				Consolidated Statements of Income classification
	Three months ended March 31
(In millions)	2025		2024
Gain (loss) on derivatives not designated as hedges
Currency exchange contracts	$	18	$	20	Interest expense - net

Total	$	18	$	20

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 income (loss)				Location of gain (loss) reclassified from Accumulated other comprehensive loss	Gain (loss) reclassified from Accumulated other comprehensive loss
	Three months ended March 31					Three months ended March 31
(In millions)	2025		2024			2025		2024
Derivatives designated as cash flow hedges
Forward starting floating-to-fixed interest rate swaps	$	4	$	2	Interest expense - net	$	3	$	3

Currency exchange contracts	4		3		Net sales and Cost of products sold	(8)		8
Commodity contracts	1		1		Cost of products sold	—		(1)

Derivatives designated as net investment hedges
Currency exchange contracts
Effective portion	(7)		11		Gain (loss) on sale of business	—		—
Amount excluded from effectiveness testing	2		3		Interest expense - net	2		4

Cross-currency interest rate swaps
Effective portion	(17)		—		Gain (loss) on sale of business	—		—
Amount excluded from effectiveness testing not amortized to earnings	8		—		Gain (loss) on sale of business	—		—

Non-derivative designated as net investment hedges
Foreign currency denominated debt	(123)		72		Gain (loss) on sale of business	—		—
Total	$	(128)	$	92		$	(2)	$	15

The pre-tax gain (loss) on derivative financial instruments designated as net investment hedges included in Accumulated other comprehensive loss is as follows:


	Gain (loss) included in Accumulated other comprehensive loss
(In millions)	March 31, 2025		December 31, 2024
Effective portion
Currency exchange contracts	$	20	$	27
Cross-currency interest rate swaps	(17)		—

Amount excluded from effectiveness testing
Currency exchange contracts	$	—	$	1
Cross-currency interest rate swaps	8		—

At March 31, 2025, a gain of $11 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 twelve months.