Eaton Corporation plc — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless noted otherwise, amounts are in millions of dollars. Eaton is a global power-management company operating in Electrical Americas, Electrical Global, Aerospace, Vehicle and eMobility.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $5,880 | $5,313 | $17,229 | $15,368 |
| Gross profit | $2,196 | $1,768 | $6,199 | $5,049 |
| Gross margin | 37.3% | 33.3% | 36.0% | 32.9% |
| Net income attributable to Eaton shareholders | $891 | $607 | $2,273 | $1,741 |
| Diluted EPS | $2.22 | $1.52 | $5.67 | $4.34 |
| Adjusted earnings per share (non-GAAP) | $2.47 | $2.02 | $6.57 | $5.51 |
Q3 sales rose 11% year over year, with 9% organic growth and 2% foreign-currency benefit. Nine-month sales increased 12%, all from organic growth. Management attributed growth to strength in electrical end markets including data centers, utilities and industrial markets, aerospace demand, and eMobility program ramps. Adjusted earnings and adjusted EPS are non-GAAP measures.
Q3 diluted EPS increased 46%; nine-month diluted EPS rose 31%. Management cited stronger segment performance and lower acquisition and divestiture charges as contributors. Gross-margin expansion reflected higher volume and pricing, partly offset by unfavorable product mix and operating inefficiencies in certain businesses.
Segment results
- Electrical Americas: Q3 sales $2,594, up 19%; operating margin 27.7%, versus 23.5%.
- Electrical Global: Q3 sales $1,503, up 1%; operating margin 21.8%, versus 20.6%. European weakness and supply-chain-related inefficiencies were noted.
- Aerospace: Q3 sales $867, up 13%; operating margin 24.1%, versus 24.0%.
- Vehicle: Q3 sales $753, up 1%; operating margin 17.4%, versus 16.8%. Nine-month margin declined to 15.7% from 16.3%, reflecting commodity and wage inflation and inefficiencies.
- eMobility: Q3 sales $163, up 19%, with break-even operating results versus a $2 loss. Nine-month operating loss narrowed to $5 from $7.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $2,326, compared with $1,347 in 2022. Management attributed the increase primarily to lower working-capital investment and higher net income.
- Investing cash use was $1,782, including $1,304 of net purchases of short-term investments and $514 of capital expenditures. Financing cash use was $507, including $1,035 of dividends paid.
- Cash was $348 and short-term investments were $1,558 at September 30, 2023. Short-term debt was $24; current maturities of long-term debt were $975; long-term debt was $8,150. No commercial paper or revolving-credit borrowings were outstanding.
- Available revolving credit facilities totaled $3,000. Eaton reported compliance with debt covenants and stated it believed available cash, cash flow, credit and capital-market access were sufficient for operating needs and scheduled debt payments.
- Capital expenditures were $514 for the first nine months; management expected approximately $700 for full-year 2023. Dividends declared were $0.86 per share in Q3, and the company said it intended to continue quarterly dividends in 2023.
Material changes and notable items
- Net sales, gross margin, net income and diluted EPS improved materially from the prior-year comparable periods. Q3 gross margin rose 4.0 percentage points.
- Q3 acquisition and divestiture charges fell to $18 from $103; nine-month charges were $69 versus $182. The 2022 comparison included costs related to exiting Russia and other transaction and integration costs.
- The effective tax rate rose to 17.3% in Q3 from 15.5%, and to 16.9% for nine months from 15.4%, primarily due to greater income in higher-tax jurisdictions.
- No shares were repurchased in the first nine months of 2023; $4,714 remained available under the repurchase authorization as of September 30.
- Firm backlog was approximately $12.9 billion, with about 81% targeted for delivery within 12 months. The filing cautions that many customer orders are subject to releases and are not considered firm.
Outlook, risks and contingencies
- The filing provides no full-year earnings or sales guidance in the text provided. It forecasts approximately $700 million of 2023 capital expenditures and expected completion of the restructuring program in 2023. Estimated total program charges were $380 million, with projected mature-year savings of $265 million.
- Management described growth opportunities tied to electrification, energy transition, digitalization, infrastructure spending, data centers, utilities, and commercial aerospace and defense.
- Eaton warned that implementation of global minimum-tax rules could materially negatively affect its effective tax rate, financial condition, results and cash flows.
- Risks identified include market and customer demand changes, supply-chain disruptions, pricing and input-cost pressures, acquisitions and integration, interest and tax rates, currency movements, geopolitical events, litigation and broader economic deterioration. The company reported no material change in risk factors from its 2022 Form 10-K.
- Eaton is subject to varied legal claims, including claims involving historic products that may have contained asbestos. Management said it did not expect these matters to have a material adverse effect on the financial statements.
- Management reported disclosure controls were effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether strong organic growth and margin gains persist, particularly in Electrical Americas, and whether Electrical Global and Vehicle overcome regional weakness and operating inefficiencies.
- How the $12.9 billion backlog converts to sales, given the filing’s distinction between firm backlog and orders subject to customer releases.
- Debt maturities and refinancing needs, particularly the $975 million current portion of long-term debt and the Euro notes due June 2024.
- Whether working-capital performance, capital spending and dividends remain consistent with operating cash generation.
- The eventual impact of global minimum-tax legislation and the outcome or cost of legal and other contingencies.