Eaton Corporation plc — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unless noted otherwise, financial amounts are in millions of U.S. dollars. Eaton is a global power-management company operating across six segments.
Financial performance
- Revenue: $5,305, up 1% from $5,251. Organic sales rose 4%, partly offset by a 3% negative currency impact.
- Profit: Net income attributable to Eaton shareholders was $522, up 7%; diluted EPS was $1.23, up 12%. Management-reported adjusted earnings were $533, or $1.26 per diluted share, excluding $11 after tax of acquisition integration and divestiture charges.
- Margins: Gross margin increased to 32.6% from 32.0%. Segment operating profit was $846 versus $796; reported segment margins improved in Electrical Products, Electrical Systems and Services, Aerospace and Vehicle, but declined in Hydraulics and eMobility.
- Cash flow: Operating cash flow was $551 versus $339. Capital expenditures were $149, making operating cash flow less capital expenditures $402, compared with $208 in Q1 2018. Investing used $68; financing used $471. Cash increased $20 to $303.
- Liquidity and debt: Cash and short-term investments totaled $446. Short-term debt was $741, current long-term debt $42, and long-term debt $6,782; total reported borrowings were $7,565. Current assets were $7,744 against current liabilities of $5,286. Eaton reported no borrowings under its $2 billion revolving credit facilities and said it was compliant with debt covenants.
- Capital returns: Dividends declared were $0.71 per share. Eaton paid $302 in dividends and repurchased 1.9 million shares for $150 under a new $5 billion authorization.
Material changes and segment trends
- Electrical Products sales rose 2% and operating profit rose 8%; Electrical Systems and Services sales rose 6% and profit rose 15%.
- Aerospace sales rose 10% and profit rose 30%, supported by higher volume and favorable mix.
- Hydraulics sales fell 3% and profit fell 11%, with unfavorable product mix. Vehicle sales fell 9% amid weak global light-vehicle markets and revenue moving to the Eaton Cummins joint venture. eMobility sales rose 8%, but operating profit fell 55% as research and development costs increased.
- Corporate expense increased to $243 from $231, primarily reflecting costs related to the planned Lighting business spin-off.
- Backlog was approximately $5.5 billion at March 31, versus $5.3 billion at year-end; Eaton expected to recognize about 87% within the next 12 months.
Outlook, events and risks
- Portfolio plans: Eaton announced plans to pursue a tax-free spin-off of its Lighting business, expected by year-end 2019, and to sell its Automotive Fluid Conveyance business. These were plans, not completed transactions as of the reporting period.
- Subsequent acquisition: On April 15, 2019, Eaton completed the purchase of an 82.275% controlling interest in Turkey-based Ulusoy Elektrik for approximately $214; the company reported sales of $126 for the 12 months ended September 30, 2018. Eaton applied to make a mandatory tender offer for remaining shares.
- Tax contingency: In February 2019, the Tax Court granted the IRS partial summary judgment on a controlled-foreign-corporation income issue for 2007–2010. Eaton intended to appeal, recorded no additional impact, and said the potential impact was not yet estimable; a separate transfer-pricing issue remained unresolved.
- Legal matter: Eaton had paid $297 in November 2018 following an arbitration award in the Pepsi/Pneumo Abex matter. Its appeal was dismissed April 25, 2019. Eaton stated that its broader range of legal matters was not expected to have a material adverse effect.
- Accounting and other risks: Adoption of the new lease standard added operating lease assets and liabilities; management reported no material income-statement or cash-flow impact. The filing reported no material change in market-risk exposures or risk factors from the 2018 Form 10-K. Results are interim and not necessarily indicative of full-year performance. Forward-looking statements remain subject to market, customer, cost, currency, interest-rate, tax, litigation and other risks.
- Guidance: The provided filing text does not state a clear numerical earnings or revenue forecast for the year.
Most important facts for investors to verify
- Whether organic growth, gross-margin improvement and segment trends—particularly weakness in Vehicle and Hydraulics and lower eMobility profitability—persist.
- Execution, timing, costs and financial effects of the Lighting spin-off and Automotive Fluid Conveyance sale.
- Developments and potential exposure from the IRS tax dispute and other legal contingencies.
- Cash generation, working-capital movements, debt levels and the pace of share repurchases and dividends.
- Integration and performance of Ulusoy Elektrik following its April 2019 acquisition.