Eaton Corporation plc — Q2 2020 Form 10-Q
Business context and reporting period. Eaton is a global power-management company. This unaudited filing covers the three and six months ended June 30, 2020; financial amounts are in millions of dollars unless stated otherwise. COVID-19 materially affected demand across several end markets. Eaton also reorganized its reportable segments in 2020; prior-period segment figures were recast, but consolidated results were unchanged.
Financial results and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $3,856 | $5,533 | $8,645 | $10,838 |
| Gross margin | 25.4% | 33.2% | 28.5% | 32.9% |
| Net income attributable to Eaton shareholders | $51 | $636 | $489 | $1,158 |
| Diluted EPS | $0.13 | $1.50 | $1.20 | $2.73 |
| Adjusted diluted EPS (non-GAAP) | $0.70 | $1.53 | $1.79 | $2.79 |
- Q2 sales declined 30%, including a 22% decline in organic sales; first-half sales declined 20%, including a 15% organic decline. Management attributed the declines primarily to COVID-19 and lower volumes.
- Q2 adjusted earnings were $279 versus $650 a year earlier. Adjusted results exclude specified acquisition/divestiture items and restructuring charges; they are non-GAAP measures.
- For the six months, operating cash flow was $1,080, versus $1,431 in 2019. Investing activities provided $900, including $1,408 of proceeds from the Lighting sale. Financing activities used $2,034, including $1,300 of share repurchases and $592 of dividends paid. Cash ended the period at $292, down from $370 at year-end 2019.
- At June 30, cash and short-term investments totaled $496. Debt comprised $139 short-term debt, $1,223 current long-term debt, and $6,906 long-term debt. The company reported no borrowings under its $2 billion revolving credit facilities and compliance with debt covenants.
- Segment performance was uneven. Q2 sales fell 59% in Vehicle, 35% organically in Aerospace, and 32% in Hydraulics; Vehicle and eMobility reported operating losses. Electrical Americas’ operating margin increased to 20.7%, while Electrical Global’s declined to 16.0%.
Material changes, outlook and risks
- Eaton sold its Lighting business on March 2 for $1.4 billion and recorded a $221 pretax gain ($91 after tax for the six-month period). It agreed to sell Hydraulics for $3.3 billion cash, subject to approvals and other conditions; closing was expected by the end of Q1 2021. Hydraulics assets and liabilities were classified as held for sale at June 30.
- A multi-year restructuring program generated $187 of Q2 charges. Eaton estimated total charges of $280, with additional costs expected through 2022, and projected mature-year savings of $200 when fully implemented in 2023.
- Management said it expected COVID-19 to remain a headwind and anticipated an unfavorable impact on Q3 results, but provided no specific earnings or sales guidance in the supplied filing text. It expected several markets to take time to recover, particularly commercial aerospace, oil and gas, NAFTA Class 8 trucks, and North American and European light vehicles.
- Management cited operating cash generation, available cash and investments, capital-market access, and expected Hydraulics sale proceeds as supporting liquidity. It also described cost-control actions, including unpaid leave programs, travel and hiring freezes, and reduced discretionary and capital spending.
- COVID-19’s duration, spread, severity, containment measures, and pace of economic recovery were identified as uncertain risks. Eaton also disclosed ordinary-course legal matters, including historic asbestos claims, and said it did not expect them to have a material adverse effect on consolidated financial statements. No material changes in market-risk exposures were reported.
Important facts for investors to verify
- Progress and final proceeds, timing, and conditions for the Hydraulics divestiture.
- Whether market demand and segment margins recover, particularly in aerospace, vehicle, and hydraulics markets.
- Whether restructuring charges remain within the $280 estimate and the projected $200 savings are achieved by 2023.
- Cash generation, debt maturities, and liquidity after substantial repurchases and dividends.
- The basis and reconciliation of non-GAAP adjusted earnings and per-share measures to GAAP results.