DUBLIN — Power management company Eaton Corporation plc today announced that earnings per share were $1.44 for the third quarter of 2019. Adjusted earnings per share, which exclude charges of $0.08 per share for acquisition and divestiture transaction and integration costs, were $1.52. This represents an increase of 6 percent over the third quarter of 2018, excluding the 2018 arbitration decision related to the legacy Cooper business.
Sales in the third quarter of 2019 were $5.3 billion, down 2 percent from the third quarter of 2018. Organic sales were down 1 percent and negative currency translation was 1½ percent, partially offset by the acquisitions of Ulusoy and Innovative Switchgear, which added ½ percent to sales.
- Third Quarter Adjusted Earnings Per Share of $1.52, Up 6 Percent Over the Third Quarter of 2018, Excluding Acquisition and
- Divestiture Costs and 2018 Arbitration Decision Expense
- Record Adjusted Segment Margin in Third Quarter of 18.7 Percent
- Operating Cash Flow in Third Quarter of $1.1 Billion, A New Quarterly Record
- Lowering Midpoint of Full-Year 2019 Adjusted Earnings Per Share Guidance to $5.72, Nine Cents Below Current Consensus Due to Lower Markets
- Operating Cash Flow for 2019 Now Expected to be Between $3.4 Billion and $3.6 Billion, $100 Million Above Prior Guidance
Craig Arnold, Eaton chairman and chief executive officer, said, “We had a solid third quarter, with adjusted earnings per share up 6 percent over 2018 excluding the 2018 arbitration decision, despite market growth coming in significantly lower than our expectations. Our organic sales growth was down 1 percent. As we began the quarter, we expected organic sales would be up 3 percent. Our adjusted segment margins in the third quarter were 18.7 percent, an all-time record and above the high end of our guidance. This represents a 110 basis point improvement over the third quarter of 2018. We had all-time record margins in three of our segments – – Electrical Products, Electrical Systems and Services, and Aerospace. Together, these three segments represent nearly 80 percent of our segment operating profits.
“Operating cash flow in the third quarter was $1.1 billion, a new quarterly record. We now expect full year 2019 operating cash flow to be between $3.4 billion and $3.6 billion, $100 million above our prior guidance. This reflects a cash conversion ratio above 120 percent,” said Arnold. “We continued to return substantial cash to our shareholders in the quarter, repurchasing $539 million of our shares, bringing our year-to-date repurchases to a total of $949 million, or 2.8 percent of the shares outstanding at the start of 2019.
“For full year 2019, we now expect organic sales to grow 1 percent, compared to our previous estimate of 3 percent, and we estimate the impact of negative currency translation to be $350 million, $50 million higher than our previous expectation. As a result, we now expect 2019 adjusted earnings per share to be between $5.67 and $5.77, down at the midpoint 9 cents from consensus, and representing a 6 percent increase over 2018, excluding the 2018 arbitration decision,” said Arnold. “Accordingly, for the fourth quarter of 2019, we anticipate adjusted earnings per share to be between $1.36 and $1.46.”
Business Segment Results
Sales for the Electrical Products segment were $1.8 billion, flat with the third quarter of 2018. Organic sales were up 1 percent, offset by negative currency translation of 1 percent. Operating profits were $358 million. Excluding $4 million of transaction costs related to the divestiture of the Lighting business, adjusted operating profits were $362 million, up 6 percent over the third quarter of 2018.
“Operating margins in the third quarter were 20.0 percent,” said Arnold. “Excluding costs related to the divestiture of the Lighting business, adjusted operating margins were 20.3 percent, up 110 basis points over 2018 and an all-time quarterly record.
“In mid-October, we signed an agreement to sell our lighting business to Signify for a price of $1.4 billion,” said Arnold. “We believe this is a good outcome for our employees and shareholders.
“Orders in the third quarter, excluding Lighting, were up 1 percent, with growth strongest in residential and commercial construction markets in the Americas,” said Arnold.
Sales for the Electrical Systems and Services segment were $1.6 billion, up 3 percent over the third quarter of 2018. Organic sales were up 3 percent and the acquisition of Ulusoy and Innovative Switchgear added 1½ percent to sales, which was partially offset by negative currency translation of 1½ percent. Operating profits were $284 million. Excluding transaction and acquisition integration costs of $3 million related to Ulusoy and Innovative Switchgear, adjusted operating profits were $287 million, up 23 percent over the third quarter of 2018.
“Operating margins were 18.1 percent. Excluding transaction and acquisition integration costs, adjusted operating margins were 18.3 percent, an improvement of 290 basis points over 2018 and an all-time record,” said Arnold. “The twelve-month rolling average of our orders in the third quarter was up 5 percent, with growth across all regions. Excluding hyperscale data center orders, which are sometimes lumpy due to customers placing orders for multiple years in a single quarter, the twelve-month rolling average of our orders in the third quarter was up 8 percent, the same as in the second quarter.”
Hydraulics segment sales were $603 million, down 10 percent from the third quarter of 2018. Organic sales were down 8 percent and negative currency translation was 2 percent. Revenue declined due to weakness in the global mobile equipment market and destocking at both OEMs and distributors. Operating profits in the third quarter were $72 million, down 23 percent from the third quarter of 2018.
“We were pleased to see the margin step up in Hydraulics in the third quarter, with margins rising to 11.9 percent versus 11.5 percent in the second quarter of this year despite seasonally lower revenue,” said Arnold. “Orders in the third quarter decreased 14 percent from the third quarter of 2018, driven by continued weakness in the global mobile equipment market.”
Aerospace segment sales were $513 million, up 7 percent over the third quarter of 2018. Organic sales were up 8 percent, partially offset by negative currency translation of 1 percent. Operating profits in the third quarter were $129 million, up 23 percent over the third quarter of 2018.
“Operating margins in the quarter were 25.1 percent, an all-time record, up 310 basis points over 2018,” said Arnold. “The twelve-month rolling average of our orders in the third quarter was up 13 percent. We saw particular strength in orders for the military market, specifically for fighters, rotorcraft, and aftermarket, as well as for business jets.”
The Vehicle segment posted sales of $761 million, down 13 percent from the third quarter of 2018. Organic sales were down 12 percent and currency translation was negative 1 percent. Operating profits in the third quarter were $139 million, down 16 percent from the third quarter of 2018.
“Operating margins in the quarter were 18.3 percent,” said Arnold. “Our revenue in Vehicle declined due to global weakness in light vehicle markets, as well as revenues that transferred over to the Eaton Cummins joint venture.”
eMobility segment sales were $79 million, down 1 percent from the third quarter of 2018. Organic sales were flat and negative currency translation was 1 percent. Operating profits in the third quarter were $4 million, down 60 percent from the third quarter of 2018 due to increased investment in research and development. Operating margins in the quarter were 5.1 percent.
Financial Results
The company’s comparative financial results for the nine months ended September 30, 2019 are available on the company’s website, www.eaton.com.
|
EATON CORPORATION plc |
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CONSOLIDATED STATEMENTS OF INCOME |
||||||||||||||||
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|
|
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Three months ended |
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Nine months ended |
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|
(In millions except for per share data) |
2019 |
|
2018 |
|
2019 |
|
2018 |
|||||||||
|
Net sales |
$ |
5,314 |
|
|
$ |
5,412 |
|
|
$ |
16,152 |
|
|
$ |
16,150 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Cost of products sold |
3,512 |
|
|
3,597 |
|
|
10,782 |
|
|
10,841 |
|
|||||
|
Selling and administrative expense |
885 |
|
|
889 |
|
|
2,709 |
|
|
2,679 |
|
|||||
|
Research and development expense |
147 |
|
|
138 |
|
|
454 |
|
|
439 |
|
|||||
|
Interest expense – net |
54 |
|
|
67 |
|
|
183 |
|
|
205 |
|
|||||
|
Arbitration decision expense |
— |
|
|
275 |
|
|
— |
|
|
275 |
|
|||||
|
Other (income) expense – net |
(2 |
) |
|
7 |
|
|
(35 |
) |
|
13 |
|
|||||
|
Income before income taxes |
718 |
|
|
439 |
|
|
2,059 |
|
|
1,698 |
|
|||||
|
Income tax expense |
116 |
|
|
23 |
|
|
299 |
|
|
184 |
|
|||||
|
Net income |
602 |
|
|
416 |
|
|
1,760 |
|
|
1,514 |
|
|||||
|
Less net income for noncontrolling interests |
(1 |
) |
|
— |
|
|
(1 |
) |
|
— |
|
|||||
|
Net income attributable to Eaton ordinary shareholders |
$ |
601 |
|
|
$ |
416 |
|
|
$ |
1,759 |
|
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Net income per share attributable to Eaton ordinary shareholders |
|
|
|
|
|
|
|
|||||||||
|
Diluted |
$ |
1.44 |
|
|
$ |
0.95 |
|
|
$ |
4.16 |
|
|
$ |
3.45 |
|
|
|
Basic |
1.44 |
|
|
0.96 |
|
|
4.18 |
|
|
3.47 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Weighted-average number of ordinary shares outstanding |
|
|
|
|
|
|
|
|||||||||
|
Diluted |
418.4 |
|
|
436.3 |
|
|
422.5 |
|
|
438.4 |
|
|||||
|
Basic |
416.6 |
|
|
433.5 |
|
|
420.7 |
|
|
435.8 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Cash dividends declared per ordinary share |
$ |
0.71 |
|
|
$ |
0.66 |
|
|
$ |
2.13 |
|
|
$ |
1.98 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Reconciliation of net income attributable to Eaton ordinary shareholders to adjusted earnings |
|
|
|
|
|
|
|
|||||||||
|
Net income attributable to Eaton ordinary shareholders |
$ |
601 |
|
|
$ |
416 |
|
|
$ |
1,759 |
|
|
$ |
1,514 |
|
|
|
Excluding acquisition integration and divestiture charges (after-tax) |
35 |
|
|
— |
|
|
60 |
|
|
— |
|
|||||
|
Adjusted earnings |
$ |
636 |
|
|
$ |
416 |
|
|
$ |
1,819 |
|
|
$ |
1,514 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Net income per share attributable to Eaton ordinary shareholders – diluted |
$ |
1.44 |
|
|
$ |
0.95 |
|
|
$ |
4.16 |
|
|
$ |
3.45 |
|
|
|
Excluding per share impact of acquisition integration and divestiture charges (after-tax) |
0.08 |
|
|
— |
|
|
0.14 |
|
|
— |
|
|||||
|
Adjusted earnings per ordinary share |
$ |
1.52 |
|
|
$ |
0.95 |
|
|
$ |
4.30 |
|
|
$ |
3.45 |
|
|
See accompanying notes.
|
EATON CORPORATION plc |
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BUSINESS SEGMENT INFORMATION |
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Three months ended |
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Nine months ended |
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|
(In millions) |
2019 |
|
2018 |
|
2019 |
|
2018 |
|||||||||
|
Net sales |
|
|
|
|
|
|
|
|||||||||
|
Electrical Products |
$ |
1,786 |
|
|
$ |
1,789 |
|
|
$ |
5,395 |
|
|
$ |
5,327 |
|
|
|
Electrical Systems and Services |
1,572 |
|
|
1,519 |
|
|
4,618 |
|
|
4,413 |
|
|||||
|
Hydraulics |
603 |
|
|
670 |
|
|
1,987 |
|
|
2,103 |
|
|||||
|
Aerospace |
513 |
|
|
478 |
|
|
1,532 |
|
|
1,399 |
|
|||||
|
Vehicle |
761 |
|
|
876 |
|
|
2,374 |
|
|
2,668 |
|
|||||
|
eMobility |
79 |
|
|
80 |
|
|
246 |
|
|
240 |
|
|||||
|
Total net sales |
$ |
5,314 |
|
|
$ |
5,412 |
|
|
$ |
16,152 |
|
|
$ |
16,150 |
|
|
|
|
|
|
|
|
|
|
|
|||||||||
|
Segment operating profit |
|
|
|
|
|
|
|
|||||||||
|
Electrical Products |
$ |
358 |
|
|
$ |
343 |
|
|
$ |
1,050 |
|
|
$ |
984 |
|
|
|
Electrical Systems and Services |
284 |
|
|
234 |
|
|
751 |
|
|
628 |
|
|||||
|
Hydraulics |
72 |
|
|
94 |
|
|
232 |
|
|
285 |
|
|||||
|
Aerospace |
129 |
|
|
105 |
|
|
372 |
|
|
284 |
|
|||||
|
Vehicle |
139 |
|
|
166 |
|
|
397 |
|
|
464 |
|
|||||
|
eMobility |
4 |
|
|
10 |
|
|
16 |
|
|
35 |
|
|||||
|
Total segment operating profit |
986 |
|
|
952 |
|
|
2,818 |
|
|
2,680 |
|
|||||
|
|
|
|
|
|
|
|
|
|||||||||
|
Corporate |
|
|
|
|
|
|
|
|||||||||
|
Amortization of intangible assets |
(93 |
) |
|
(95 |
) |
|
(280 |
) |
|
(289 |
) |
|||||
|
Interest expense – net |
(54 |
) |
|
(67 |
) |
|
(183 |
) |
|
(205 |
) |
|||||
|
Pension and other postretirement benefits expense |
(5 |
) |
|
(3 |
) |
|
(7 |
) |
|
(4 |
) |
|||||
|
Arbitration decision expense |
— |
|
|
(275 |
) |
|
— |
|
|
(275 |
) |
|||||
|
Other corporate expense – net |
(116 |
) |
|
(73 |
) |
|
(289 |
) |
|
(209 |
) |
|||||
|
Income before income taxes |
718 |
|
|
439 |
|
|
2,059 |
|
|
1,698 |
|
|||||
|
Income tax expense |
116 |
|
|
23 |
|
|
299 |
|
|
184 |
|
|||||
|
Net income |
602 |
|
|
416 |
|
|
1,760 |
|
|
1,514 |
|
|||||
|
Less net income for noncontrolling interests |
(1 |
) |
|
— |
|
|
(1 |
) |
|
— |
|
|||||
|
Net income attributable to Eaton ordinary shareholders |
$ |
601 |
|
|
$ |
416 |
|
|
$ |
1,759 |
|
|
$ |
1,514 |
|
|
See accompanying notes.
|
EATON CORPORATION plc |
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|
CONDENSED CONSOLIDATED BALANCE SHEETS |
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|
|
|
|
|
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|
|
September 30, |
|
December 31, |
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|
(In millions) |
||||||||
|
Assets |
|
|
|
|||||
|
Current assets |
|
|
|
|||||
|
Cash |
$ |
549 |
|
|
$ |
283 |
|
|
|
Short-term investments |
281 |
|
|
157 |
|
|||
|
Accounts receivable – net |
3,787 |
|
|
3,858 |
|
|||
|
Inventory |
2,901 |
|
|
2,785 |
|
|||
|
Prepaid expenses and other current assets |
494 |
|
|
507 |
|
|||
|
Total current assets |
8,012 |
|
|
7,590 |
|
|||
|
|
|
|
|
|||||
|
Property, plant and equipment – net |
3,483 |
|
|
3,467 |
|
|||
|
|
|
|
|
|||||
|
Other noncurrent assets |
|
|
|
|||||
|
Goodwill |
13,337 |
|
|
13,328 |
|
|||
|
Other intangible assets |
4,657 |
|
|
4,846 |
|
|||
|
Operating lease assets |
444 |
|
|
— |
|
|||
|
Deferred income taxes |
294 |
|
|
293 |
|
|||
|
Other assets |
1,668 |
|
|
1,568 |
|
|||
|
Total assets |
$ |
31,895 |
|
|
$ |
31,092 |
|
|
|
|
|
|
|
|||||
|
Liabilities and shareholders’ equity |
|
|
|
|||||
|
Current liabilities |
|
|
|
|||||
|
Short-term debt |
$ |
2 |
|
|
$ |
414 |
|
|
|
Current portion of long-term debt |
6 |
|
|
339 |
|
|||
|
Accounts payable |
2,290 |
|
|
2,130 |
|
|||
|
Accrued compensation |
421 |
|
|
457 |
|
|||
|
Other current liabilities |
1,942 |
|
|
1,814 |
|
|||
|
Total current liabilities |
4,661 |
|
|
5,154 |
|
|||
|
|
|
|
|
|||||
|
Noncurrent liabilities |
|
|
|
|||||
|
Long-term debt |
8,013 |
|
|
6,768 |
|
|||
|
Pension liabilities |
1,239 |
|
|
1,304 |
|
|||
|
Other postretirement benefits liabilities |
322 |
|
|
321 |
|
|||
|
Operating lease liabilities |
333 |
|
|
— |
|
|||
|
Deferred income taxes |
309 |
|
|
349 |
|
|||
|
Other noncurrent liabilities |
1,118 |
|
|
1,054 |
|
|||
|
Total noncurrent liabilities |
11,334 |
|
|
9,796 |
|
|||
|
|
|
|
|
|||||
|
Shareholders’ equity |
|
|
|
|||||
|
Eaton shareholders’ equity |
15,848 |
|
|
16,107 |
|
|||
|
Noncontrolling interests |
52 |
|
|
35 |
|
|||
|
Total equity |
15,900 |
|
|
16,142 |
|
|||
|
Total liabilities and equity |
$ |
31,895 |
|
|
$ |
31,092 |
|
|
See accompanying notes.
EATON CORPORATION plc NOTES TO THE THIRD QUARTER 2019 EARNINGS RELEASE
Amounts are in millions of dollars unless indicated otherwise (per share data assume dilution).
Note 1. NON-GAAP FINANCIAL INFORMATION
This earnings release includes certain non-GAAP financial measures. These financial measures include adjusted earnings, adjusted earnings per ordinary share, and operating profit before acquisition integration and divestiture charges for each business segment as well as corporate, each of which differs from the most directly comparable measure calculated in accordance with generally accepted accounting principles (GAAP). A reconciliation of each of these financial measures to the most directly comparable GAAP measure is included in this earnings release. Management believes that these financial measures are useful to investors because they exclude certain transactions, allowing investors to more easily compare Eaton Corporation plc’s (Eaton or the Company) financial performance period to period. Management uses this information in monitoring and evaluating the on-going performance of Eaton and each business segment.
Net income per ordinary share of $4.91 for the year ended December 31, 2018 was $5.39 excluding the $0.48 per share expense from an arbitration decision related to the legacy Cooper Industries business acquired in 2012. Net income per ordinary share of $0.95 for the third quarter of 2018 was $1.43 excluding $0.48 per share impact from the expense related to the arbitration decision.
Note 2. ACQUISITION INTEGRATION AND DIVESTITURE CHARGES
Eaton incurs integration charges related to acquired businesses, and transaction and other charges to divest and exit businesses. A summary of these charges follows:
|
|
Acquisition |
|
Operating profit |
|
Operating profit excluding |
|||||||||||||||||||
|
|
Three months ended September 30, 2019 |
|||||||||||||||||||||||
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|||||||||||||
|
Business segment |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Electrical Products |
$ |
4 |
|
|
$ |
— |
|
|
$ |
358 |
|
|
$ |
343 |
|
|
$ |
362 |
|
|
$ |
343 |
|
|
|
Electrical Systems and Services |
3 |
|
|
— |
|
|
284 |
|
|
234 |
|
|
287 |
|
|
234 |
|
|||||||
|
Hydraulics |
— |
|
|
— |
|
|
72 |
|
|
94 |
|
|
72 |
|
|
94 |
|
|||||||
|
Aerospace |
— |
|
|
— |
|
|
129 |
|
|
105 |
|
|
129 |
|
|
105 |
|
|||||||
|
Vehicle |
— |
|
|
— |
|
|
139 |
|
|
166 |
|
|
139 |
|
|
166 |
|
|||||||
|
eMobility |
— |
|
|
— |
|
|
4 |
|
|
10 |
|
|
4 |
|
|
10 |
|
|||||||
|
Total business segments |
7 |
|
|
— |
|
|
$ |
986 |
|
|
$ |
952 |
|
|
$ |
993 |
|
|
$ |
952 |
|
|||
|
Corporate |
32 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total acquisition integration and divestiture charges before income taxes |
39 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Income taxes |
4 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total after income taxes |
$ |
35 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|||||||||
|
Per ordinary share – diluted |
$ |
0.08 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|||||||||
|
|
Acquisition |
|
Operating profit |
|
Operating profit excluding |
|||||||||||||||||||
|
|
Nine months ended September 30, 2019 |
|||||||||||||||||||||||
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|||||||||||||
|
Business segment |
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
Electrical Products |
$ |
6 |
|
|
$ |
— |
|
|
$ |
1,050 |
|
|
$ |
984 |
|
|
$ |
1,056 |
|
|
$ |
984 |
|
|
|
Electrical Systems and Services |
4 |
|
|
— |
|
|
751 |
|
|
628 |
|
|
755 |
|
|
628 |
|
|||||||
|
Hydraulics |
— |
|
|
— |
|
|
232 |
|
|
285 |
|
|
232 |
|
|
285 |
|
|||||||
|
Aerospace |
— |
|
|
— |
|
|
372 |
|
|
284 |
|
|
372 |
|
|
284 |
|
|||||||
|
Vehicle |
— |
|
|
— |
|
|
397 |
|
|
464 |
|
|
397 |
|
|
464 |
|
|||||||
|
eMobility |
— |
|
|
— |
|
|
16 |
|
|
35 |
|
|
16 |
|
|
35 |
|
|||||||
|
Total business segments |
10 |
|
|
— |
|
|
$ |
2,818 |
|
|
$ |
2,680 |
|
|
$ |
2,828 |
|
|
$ |
2,680 |
|
|||
|
Corporate |
55 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total acquisition integration and divestiture charges before income taxes |
65 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Income taxes |
5 |
|
|
— |
|
|
|
|
|
|
|
|
|
|||||||||||
|
Total after income taxes |
$ |
60 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|||||||||
|
Per ordinary share – diluted |
$ |
0.14 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|||||||||
Business segment charges in 2019 related to the planned divestiture of the Lighting business and the acquisitions of Ulusoy Elektrik Imalat Taahhut ve Ticaret A.S. and Innovative Switchgear Solutions, Inc., and were included in Cost of products sold, Selling and administrative expense or Research and development expense. In Business Segment Information, the charges reduced Operating profit of the related business segment.
Corporate charges in 2019 are primarily related to the planned divestiture of the Lighting business and other charges to exit businesses and were included in Selling and administrative expense and Other (income) expense-net. In Business Segment Information, the charges were included in Other corporate expense – net.
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