Eaton Corporation plc — 2012 Form 10-K
Reporting period: Year ended December 31, 2012; quarterly figures below relate to the fourth quarter. Eaton plc became the successor registrant to Eaton Corporation on November 30, 2012, when it acquired Cooper Industries. Eaton is a global power-management company operating across electrical, hydraulics, aerospace, truck and automotive markets.
Financial performance and condition
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $16.311 billion | $16.049 billion | +2% |
| Gross profit margin | 29.8% | 29.8% | Flat |
| Income before taxes | $1.251 billion | $1.553 billion | -19% |
| Net income attributable to Eaton shareholders | $1.217 billion | $1.350 billion | -10% |
| Diluted earnings per share | $3.46 | $3.93 | -12% |
| Operating cash flow | $1.664 billion | $1.248 billion | +$416 million |
| Capital expenditures | $593 million | $568 million | +$25 million |
- Management’s non-GAAP operating earnings were $1.384 billion, up 2%; operating EPS was $3.94 versus $3.96. These measures exclude after-tax acquisition integration charges and transaction costs totaling $167 million in 2012.
- Cash and short-term investments were $1.104 billion at year-end. Total debt was $10.833 billion, including $757 million of short-term debt; the reported net-debt-to-capital ratio was 39.2%, versus 26.5% in 2011.
- Current assets were $7.844 billion and current liabilities were $5.431 billion. Long-term debt was $9.762 billion. Eaton had $2.0 billion of revolving credit facilities, with no borrowings outstanding under them at year-end.
- Cash dividends declared were $1.52 per share, up from $1.36. The company reported an effective tax rate of 2.5%, compared with 12.9%; a significant international tax benefit and other tax factors drove the reduction.
Material changes and unusual items
- Cooper was acquired on November 30 for $13.192 billion, comprising $6.543 billion cash and $6.649 billion in Eaton shares. Eaton included only Cooper’s results from November 30 through year-end: $470 million sales and $66 million segment operating profit. This short inclusion period limits comparison of reported 2012 results with prior years.
- Cooper contributed $8.504 billion of preliminary goodwill and $4.577 billion of preliminary identifiable intangible assets. Purchase accounting remained preliminary; subsequent valuation adjustments could materially affect financial position and results.
- Reported 2012 earnings included $178 million of acquisition transaction costs and $44 million of integration charges. Fourth-quarter restructuring charges were $50 million, including $34 million severance; the related $34 million liability was expected to be paid in the first half of 2013.
- Fourth-quarter net sales were $4.333 billion and diluted EPS was $0.46. Fourth-quarter net income attributable to Eaton shareholders was $179 million; the quarter included $152 million of transaction costs and $24 million of acquisition integration charges.
- Operating cash flow rose as working-capital needs were lower and the company did not repeat a $154 million postretirement-plan contribution made in 2011. Acquisition-related investing outflow drove total investing cash use to $6.972 billion; financing provided $5.480 billion.
- Cooper acquisition financing increased debt substantially. Eaton issued $4.9 billion of senior notes and drew on a bridge facility; the remaining $669 million bridge balance was repaid on February 1, 2013.
Outlook, commentary and risks
- For 2013, management expected end-market growth of 2%–3%, core sales growth of approximately $900 million, and total net-sales growth of 42%, including an expected $6 billion of incremental sales from recent acquisitions. Segment end-market outlook: Electrical Products 3%, Electrical Systems and Services 4%, Hydraulics -4%, Aerospace 2%, and Vehicle 2%.
- Management said 2012 markets grew more slowly than anticipated, citing economic and political uncertainty in Europe, China and the United States. Electrical Rest of World, Hydraulics, Truck and Automotive results reflected market weakness, lower volumes, currency effects or restructuring; Electrical Americas grew.
- Management expects approximately $700 million of capital expenditures in 2013. Pension contributions were expected to total $303 million in 2013; actual future funding needs depend on asset returns and discount rates.
- Key risks include realizing Cooper integration benefits, cyclical end-market weakness, customer concentration in certain segments, raw-material availability and prices, foreign exchange, cyber and operational disruptions, tax changes, and the ability to retain skilled employees. Credit agencies S&P, Moody’s and Fitch each had a negative outlook at year-end.
- Legal matters include a Meritor antitrust case for which potential loss could not be estimated, and an IRS transfer-pricing dispute proposing $75 million in additional tax plus $52 million in penalties. Environmental remediation accruals were $125 million, versus $62 million in 2011; management did not expect environmental matters to exceed the accrual by a material amount.
- The Cooper acquisition’s preliminary purchase-price allocation included $149 million of assumed contingent liabilities for environmental, legal and tax matters. Eaton also identified risks relating to possible U.S. legislative or regulatory changes affecting its Irish incorporation and tax position.
- The financial statements received an unqualified audit opinion. Internal-control assessments excluded entities acquired during 2012, which represented 50% of year-end assets and 4% of annual sales; management was evaluating the impact of Cooper on controls.
Important facts for investors to verify
- Track final Cooper purchase accounting, integration execution, and whether projected synergies and acquisition-driven growth materialize.
- Assess debt repayment, interest expense, leverage and credit-rating outlook after the acquisition; confirm the bridge facility was repaid as disclosed.
- Evaluate the quality and sustainability of the unusually low 2012 effective tax rate, tax benefits, and outstanding IRS and international tax exposures.
- Compare 2013 guidance with realized end-market demand, core sales, acquisition contribution, margins and restructuring outcomes.
- Review developments in the Meritor litigation, environmental obligations, pension funding and the integration of acquired-company financial controls.