Eaton Corporation plc — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Eaton is a global power-management company. Unless noted, amounts are in millions of U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $5,412 | $5,211 | $16,150 | $15,191 |
| Gross profit margin | 33.5% | 33.5% | 32.9% | 32.7% |
| Net income attributable to Eaton shareholders | $416 | $1,401 | $1,514 | $2,351 |
| Diluted EPS | $0.95 | $3.14 | $3.45 | $5.24 |
| Operating cash flow | Not separately provided | Not separately provided | $1,838 | $1,787 |
- Q3 sales rose 4% year over year, including 6% organic growth, partly offset by currency and divestitures. Nine-month sales increased 6%.
- Management attributed underlying earnings improvement to higher sales volumes and restructuring savings, partly offset by commodity inflation and higher freight costs. Reported earnings fell sharply because Q3 2018 included a $206 after-tax arbitration expense, while Q3 2017 included an $843 after-tax business-sale gain.
- Nine-month segment operating profit was $2,680, up from $2,357. Sales and operating profit increased across most segments; eMobility operating profit declined to $35 from $40, with margin falling to 14.6% from 19.0%, primarily due to higher R&D costs.
- Cash flow: nine-month capital expenditure was $411, giving calculated free cash flow of $1,427 (operating cash flow less capital expenditure). Cash dividends paid were $864; share repurchases were $600.
Balance sheet, debt and liquidity
- At September 30, cash was $327 and short-term investments were $178. Current assets were $7,867 versus current liabilities of $5,267.
- Total short- and long-term debt was $7,245, down from $7,751 at December 31, 2017. Cash plus short-term investments exceeded short-term debt; calculated net debt was approximately $6,740.
- Eaton reported no borrowings under its $2.0 billion revolving credit facilities and stated it was in compliance with debt covenants. Management said available cash flow, liquidity and capital-market access were sufficient for operating needs and scheduled debt payments.
- Backlog was approximately $5.4 billion; Eaton expected to recognize about 88% within the next 12 months.
Material changes, outlook and risks
- The arbitration panel ordered Cooper-related Eaton subsidiaries to pay $293 to Pneumo Abex. The company recorded a $275 pre-tax charge ($206 after tax); a Texas court confirmed the award on October 12, after quarter-end. Eaton was considering options, including appeal.
- Business sales growth was broad-based; management cited strength in industrial, construction, data-center, oil-and-gas, mobile-equipment and aerospace markets. North American Class 8 truck demand was strong, while European light-vehicle markets were weak.
- No specific full-year earnings or revenue guidance is provided in the supplied filing text. Management described the interim results as not necessarily indicative of full-year results.
- Key exposures include market and customer demand, competition and pricing, materials and freight costs, currency and interest-rate movements, litigation, tax matters, and economic conditions. The filing reported no material change in market-risk exposures or risk factors.
- The IRS proposed transfer-pricing and controlled-foreign-corporation tax adjustments; Eaton intended to pursue administrative appeals and did not expect a material financial-statement impact. A Brazil tax dispute involved an alleged $42 tax deficiency plus $128 interest and penalties; Eaton planned to challenge it in court.
- Eaton disclosed approximately €0.9 million of Q3 revenue from Iran sales by non-U.S. subsidiaries and said it would take no future orders and wind down those sales over the remainder of 2018.
- The company expected to recognize a significant lease asset and liability when adopting the new lease standard in 2019, but did not expect a material income-statement or cash-flow impact.
Most important facts for investors to verify
- Whether the $293 arbitration award is appealed, upheld, or otherwise resolved, and the ultimate cash and earnings impact.
- Whether organic growth and segment margin improvement continue, particularly amid commodity inflation and higher freight costs; monitor eMobility R&D spending and margin.
- Cash conversion, capital spending, dividends, repurchases, and debt reduction relative to operating cash flow.
- Developments in the IRS and Brazil tax matters, and final accounting for provisional Tax Cuts and Jobs Act amounts.
- Whether backlog converts as expected and whether the filing’s absence of explicit full-year guidance is supplemented by later company updates.