Eaton Corporation plc — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Amounts are in millions of dollars except per-share data. Eaton is a global power-management company operating across electrical, hydraulic, aerospace, vehicle and eMobility markets.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $5,314 | $5,412 | $16,152 | $16,150 |
| Gross profit margin | 33.9% | 33.5% | 33.2% | 32.9% |
| Net income attributable to Eaton shareholders | $601 | $416 | $1,759 | $1,514 |
| Diluted EPS | $1.44 | $0.95 | $4.16 | $3.45 |
| Adjusted diluted EPS (non-GAAP) | $1.52 | $0.95 | $4.30 | $3.45 |
- Q3 sales declined 2%; management attributed this to organic sales down 1% and negative currency translation of 1.5%, partly offset by 0.5% from acquisitions. Nine-month sales were essentially flat, with organic growth of 2% offset by negative currency translation of 2%.
- Q3 gross profit was $1,802; nine-month gross profit was $5,370. Management cited operating improvements and stronger volume or mix in certain segments.
- For the first nine months, operating cash flow was $2,514, versus $1,838 a year earlier. Capital expenditures were $441; operating cash flow less capital expenditures was $2,073 (calculated). Investing cash outflow was $832 and financing cash outflow was $1,423. Cash ended at $549.
- At September 30, cash and short-term investments totaled $830. Current assets were $8,012 and current liabilities $4,661. Total debt was approximately $8,021, compared with $7,521 at December 31, 2018. Long-term debt was $8,013. Eaton reported no borrowings under its $2 billion revolving credit facilities and compliance with debt covenants.
- Dividends declared were $0.71 per share in Q3. The company repurchased 11.9 million shares for $949 in the first nine months, including 6.8 million shares for $539 in Q3.
Changes and segment trends
- Profitability improved despite weaker total quarterly sales; the prior-year comparison included a $275 arbitration decision expense ($206 after tax). Q3 2019 included $39 of acquisition-integration and divestiture charges before tax ($35 after tax); nine-month charges were $65 before tax ($60 after tax). Adjusted earnings and adjusted EPS are non-GAAP measures.
- Electrical Systems and Services and Aerospace showed the strongest reported growth and margin gains. Q3 sales increased 3% and 7%, respectively; operating margins were 18.1% and 25.1%.
- Hydraulics and Vehicle weakened: Q3 sales fell 10% and 13%, respectively, amid mobile-equipment destocking and weakness in global light-vehicle markets. eMobility Q3 operating margin declined to 5.1% from 12.5%, primarily due to higher R&D costs.
- Share repurchases reduced weighted-average diluted shares to 418.4 million in Q3 from 436.3 million a year earlier, contributing to EPS growth.
Outlook, transactions and risks
- The filing provides no specific full-year earnings or sales guidance. Management stated that liquidity, operating flexibility and capital-market access were adequate for operating needs and scheduled debt payments.
- Eaton agreed to sell its Lighting business to Signify for $1.4 billion cash; closing was expected in Q1 2020, subject to customary conditions and regulatory approvals. The business had 2018 sales of $1.7 billion and was expected to be classified as held for sale in Q4 2019. Eaton also planned to divest its Automotive Fluid Conveyance business.
- The Souriau-Sunbank acquisition for $920 was expected to close by year-end 2019, subject to customary conditions. Eaton completed acquisitions of Ulusoy Elektrik and Innovative Switchgear Solutions during 2019.
- A long-running IRS dispute remains a material uncertainty: the Tax Court granted partial summary judgment to the IRS on a controlled-foreign-corporation income issue. Eaton intends to appeal, believes it will succeed, and recorded no additional impact; the potential amount was not estimable pending resolution of open tax years. A transfer-pricing issue also remains unresolved.
- The Pepsi arbitration judgment was paid in 2018; Cooper’s appeal was dismissed in April 2019. Eaton said its broader legal matters, including asbestos claims, were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management cited risks including economic and market downturns, customer demand, competition and pricing, input costs, currency and interest-rate movements, tax exposure, litigation, and acquisition or divestiture execution. No material change in market-risk exposures or risk factors was reported. Disclosure controls were judged effective.
Investor verification points
- Track the IRS appeal and transfer-pricing matter, including any change in the company’s estimate or tax accruals.
- Confirm timing, approvals, proceeds and held-for-sale accounting for the Lighting sale, and progress on the Automotive Fluid Conveyance divestiture.
- Verify Souriau-Sunbank closing, financing and subsequent integration costs.
- Monitor demand, margins and destocking in Hydraulics and Vehicle, and investment-related margin pressure in eMobility.
- Assess whether operating cash generation supports acquisitions, dividends and repurchases as debt increased during the period.