Eaton Corporation plc — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless noted. Eaton is a global power-management company. Financial amounts are in millions of dollars, except per-share data.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $4,813 | $5,223 | Down 8% |
| Gross profit / margin | $1,522 / 31.6% | $1,630 / 31.2% | Profit down 7%; margin up 0.4 percentage points |
| Income before taxes | $442 | $505 | Down 12% |
| Net income | $403 | $467 | Down 14% |
| Net income attributable to Eaton shareholders | $404 | $466 | Down 13% |
| Diluted EPS | $0.88 | $0.99 | Down 11% |
| Operating cash flow | $371 | $77 | Up $294 |
| Capital expenditures | $111 | $105 | Up $6 |
Management’s non-GAAP operating earnings were $404, down 15% from $473; operating EPS was $0.88 versus $1.01. Q1 2015 included $7 after-tax of acquisition-integration charges, while Q1 2016 had none. Operating cash flow less capital expenditures was $260, compared with negative $28 in Q1 2015.
Segments
- Electrical Products: Sales $1,680, down 1%; operating margin 16.1%, up from 15.4%.
- Electrical Systems and Services: Sales $1,342, down 7%; margin 11.8%, down from 12.8%.
- Hydraulics: Sales $551, down 17%; margin 7.4%, down from 9.9%.
- Aerospace: Sales $445, down 4%; margin 18.0%, up from 16.6%.
- Vehicle: Sales $795, down 17%; margin 14.8%, down from 17.2%.
Liquidity, debt, and capital allocation
At March 31, cash was $333 and short-term investments were $240. Total current assets were $7,013 and current liabilities were $5,022. Debt comprised $820 of short-term debt, $253 of current long-term debt, and $7,572 of long-term debt. The company had no borrowings under its $2,000 revolving credit facilities and reported compliance with debt covenants. Management stated liquidity and capital-market access were sufficient for operating needs and scheduled debt payments.
Cash dividends declared were $0.57 per share, versus $0.55 a year earlier. Eaton repurchased 1.8 million shares for $100 and authorized a new share-repurchase program of up to $2,500 in February 2016.
Changes, outlook, and risks
Sales fell 8%, reflecting a 6% organic decline and a 2% adverse currency impact. Management attributed lower organic sales mainly to weakening demand across several end markets. Gross margin improved despite lower volumes, unfavorable mix, and restructuring charges, primarily due to cost savings. Operating earnings were pressured by lower volumes, restructuring costs, and a higher effective tax rate; share repurchases partly supported EPS.
The multi-year restructuring program produced $63 of Q1 2016 charges, compared with $10 a year earlier. Charges are anticipated to be $140 in 2016 and $130 in 2017; projected annualized savings are $418, expected to be fully realized in 2018. These are management expectations, not guaranteed outcomes. The filing provides no specific full-year revenue or EPS guidance.
Market weakness cited included oil and gas and industrial markets, agricultural and construction equipment, and North and South American truck markets. Eaton identified risks including changes in end markets, customer demand, pricing and input costs, acquisitions, litigation, regulation, interest rates, taxes, currency and broader economic conditions. The company reported no material change in market-risk exposures or risk factors from its 2015 Form 10-K.
Legal matters include a Brazilian dispute related to a former business; Eaton had accrued $28 and stated any payment was not expected to exceed that liability. Eaton said its broader legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective as of March 31, 2016.
Important facts for investors to verify
- Whether weak demand in key industrial, oil and gas, agricultural, construction, and truck markets persists, and how it affects sales and segment margins.
- Progress and cash costs of restructuring, including whether expected annualized savings of $418 are achieved by 2018.
- The sustainability of improved operating cash flow, given the filing attributes much of the year-over-year increase to $179 lower pension and postretirement contributions; working capital used $313 of cash in Q1 2016.
- Debt maturities, liquidity, and the effect of the new $2,500 repurchase authorization and ongoing dividends on capital allocation.
- Developments in the Brazilian litigation and other legal, tax, currency, and market risks.