Eaton Corporation plc — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Amounts are in U.S. dollars; financial figures are in millions except per-share data.
Business context and results
Eaton is a power-management company operating in Electrical Americas, Electrical Global, Aerospace, Vehicle and eMobility. Its strategy emphasizes electrification, digitalization and energy-transition markets. The Hydraulics business was sold in August 2021, affecting year-over-year comparisons.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $5,313 | $4,923 | $15,368 | $14,830 |
| Gross margin | 33.3% | 32.2% | 32.9% | 32.1% |
| Net income attributable to Eaton shareholders | $607 | $629 | $1,741 | $1,593 |
| Diluted GAAP EPS | $1.52 | $1.57 | $4.34 | $3.97 |
| Adjusted earnings per share | $2.02 | $1.75 | $5.51 | $4.91 |
Q3 sales rose 8% year over year, comprising 15% organic growth, 1% from acquisitions, and negative 4% each from the Hydraulics divestiture and foreign currency. Nine-month sales rose 4%, including 12% organic growth. Q3 adjusted earnings and adjusted EPS increased 15%; these are non-GAAP measures.
Segment performance
- Electrical Americas: Q3 sales of $2,179, up 18%; operating margin rose to 23.5% from 21.7%.
- Electrical Global: sales of $1,486, up 5%; margin was 20.6%, versus 20.1%.
- Aerospace: sales of $768, up 3%; margin improved to 24.0% from 22.0%.
- Vehicle: sales of $744, up 16%; margin declined to 16.8% from 18.0%.
- eMobility: sales of $137, up 63%, partly reflecting Royal Power Solutions; operating loss narrowed to $2 from $8.
Cash flow, liquidity and debt
For the first nine months, operating cash flow was $1,347, compared with $1,368 in 2021. Working-capital increases to support growth were the principal reported drag. Investing cash outflow was $983, versus $1,688; financing cash outflow was $445, compared with $166 of inflow. Capital expenditures were $389, making operating cash flow less capital expenditures approximately $958. Cash ended at $231, down from $297 at year-end 2021; short-term investments were $287.
At September 30, current assets were $8,540 and current liabilities $6,653. Debt comprised $903 of short-term debt, $23 of current long-term debt and $8,082 of long-term debt. The company issued $2.0 billion face value of notes in August, receiving $1.98 billion net of financing costs and discounts. Commercial paper outstanding was $878; there were no revolving-credit-facility borrowings. Eaton reported compliance with debt covenants and said available liquidity was sufficient for expected needs.
Changes, outlook and risks
- Pricing recovery, higher organic volumes and mix helped lift gross margin; commodity and logistics inflation, supply constraints and selective labor shortages remained offsets. Vehicle margins declined amid these pressures.
- Q3 and nine-month GAAP earnings comparisons were affected by the 2021 Hydraulics-sale gain ($617 pretax; $197 after tax). The 2022 nine-month results included a further $24 pretax post-closing gain.
- Management expected approximately $650 of 2022 capital expenditures and intended to continue quarterly dividends and share repurchases, subject to cash generation, market conditions and capital levels. It projected about $9 of additional 2022 restructuring expense and $250 of mature-year savings when the program is fully implemented in 2023.
- Backlog was approximately $11.0 billion at September 30; about 82% was targeted for delivery within twelve months. Backlog includes only customer-committed orders under the company’s stated criteria.
- In October 2022, after quarter-end, Eaton replaced its revolving facilities with facilities totaling $3.0 billion and increased its commercial-paper program to $3.0 billion.
- Material risks include persistent supply-chain and labor constraints, inflation and the ability to recover cost increases through pricing; the filing also cites market, acquisition-integration, currency, interest-rate, tax, litigation and geopolitical risks. Eaton decided to exit Russia and recorded $29 of related charges in 2022.
- Brazilian tax assessments and U.S. tax disputes remain unresolved. Management believes the matters will not materially affect the statements, but notes that an outcome outside expectations could have a material adverse impact. The filing describes other legal claims, including asbestos claims, and states it cannot predict their outcomes.
Most important facts to verify
- How much of reported sales and profit growth reflects organic demand and pricing versus acquisitions, foreign exchange and the Hydraulics divestiture.
- Whether pricing continues to offset input-cost inflation and supply-chain inefficiencies, especially in Vehicle and other affected operations.
- Working-capital trends, operating cash conversion, and the company’s ability to fund capital spending, dividends, buybacks and debt obligations.
- Debt and liquidity after the August note issuance and October credit-facility and commercial-paper changes.
- Progress against the Scope 1 and Scope 2 emissions target tied to the sustainability-linked notes, and the potential 25-basis-point rate increase beginning in 2028 if the target is missed.
- Developments in Brazilian and U.S. tax cases, Russia exit costs, and the completion of the Royal Power Solutions purchase-price allocation.