Manufacturers

Eaton Reports 3Q Earnings

Eaton Reports 3Q Earnings

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

CONSOLIDATED STATEMENTS OF INCOME

Three months ended
September 30

Nine months ended
September 30

(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

BUSINESS SEGMENT INFORMATION

Three months ended
September 30

Nine months ended
September 30

(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

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,
2019

December 31,
2018

(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
integration and divestiture
charges

Operating profit
as reported

Operating profit excluding
acquisition integration and
divestiture charges

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
integration and divestiture
charges

Operating profit
as reported

Operating profit excluding
acquisition integration and
divestiture charges

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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