Eaton Corporation plc — Q1 2021 Form 10-Q
Business context and period: Power-management company reporting the three months ended March 31, 2021; comparative figures are for Q1 2020. Amounts are in millions of dollars except per-share data. The interim statements are unaudited, and management cautions that results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $4,692 | $4,789 | Down 2% |
| Gross profit | $1,508 | $1,487 | Up 1% |
| Gross margin | 32.1% | 31.1% | Up 1.0 percentage point |
| Income before taxes | $538 | $621 | Down 13% |
| Net income attributable to Eaton shareholders | $458 | $438 | Up 5% |
| Diluted GAAP EPS | $1.14 | $1.07 | Up 7% |
| Adjusted earnings (non-GAAP) | $577 | $514 | Up 12% |
| Adjusted diluted EPS (non-GAAP) | $1.44 | $1.25 | Up 15% |
The effective tax rate was 14.7%, versus 29.5% in Q1 2020; the prior-year rate was affected by the Lighting-business sale gain. Adjusted earnings exclude acquisition and divestiture charges, restructuring charges, and intangible amortization under the company’s revised definition.
Cash flow, liquidity and debt
- Operating cash flow was $260, down from $323, primarily reflecting a $243 U.S. pension-plan contribution; working-capital cash use was lower than in the prior-year quarter.
- Capital expenditures were $119. Net cash used in investing activities was $2,201, including $1,700 paid for acquisitions; Q1 2020 investing cash flow was positive $1,100, including $1,402 of Lighting-sale proceeds.
- Financing activities provided $1,875, including $2,261 of borrowing proceeds. Cash dividends paid were $300 and share repurchases were $59, compared with $1,300 of repurchases in Q1 2020.
- At March 31, cash was $354 and short-term investments were $945. Short-term debt was $464; current maturities of long-term debt were $1,012 and long-term debt was $8,682. The company issued €1.5 billion of notes, with maturities in 2026 and 2030 and coupon rates of 0.128% and 0.577%.
- No borrowings were outstanding under the $2.0 billion revolving credit facilities, and Eaton reported compliance with its debt covenants. Management said available cash, operating flexibility and capital-market access were sufficient for expected operating needs, acquisitions and scheduled debt payments.
Material changes and segment results
Sales fell 2% overall, principally because the Lighting divestiture reduced sales by 5.5%; positive currency translation, acquisitions and 0.5% organic growth partly offset the decline. Eaton reported organic growth in every segment except Aerospace.
- Electrical Americas: sales $1,622, down 9%; operating margin 20.5%, up from 17.2%. The sales decline reflected the Lighting sale; residential, data-center and utility demand supported organic growth.
- Electrical Global: sales $1,253, up 10%; operating margin 17.0%, up from 14.5%.
- Hydraulics: sales $561, up 11%; operating margin 15.0%, up from 10.8%. Its sale to Danfoss for $3.3 billion in cash was expected to close in Q2 2021, subject to conditions and regulatory approvals.
- Aerospace: sales $519, down 24%; operating margin 18.5%, down from 21.6%, primarily reflecting pandemic-related weakness in commercial aviation.
- Vehicle: sales $654, up 9%; operating margin 17.3%, up from 13.5%.
- eMobility: sales $83, up 15%; operating loss was $7 versus operating profit of $1. Higher R&D and manufacturing start-up costs for new electric-vehicle programs weighed on results.
Gross-margin improvement reflected higher volumes in several businesses and restructuring and cost-control savings, partly offset by Aerospace weakness. Eaton’s Q1 2020 net income included a $91 after-tax Lighting-sale gain, or $0.22 per diluted share; there was no comparable gain in Q1 2021. The lower share count following prior repurchases also contributed to EPS growth.
Outlook, commentary and risks
- A multi-year restructuring program is expected to incur a further $45 of charges in 2021 and $5 in 2022, for estimated total charges of $280. Projected mature-year savings are $200 when fully implemented in 2023.
- Eaton acquired Tripp Lite for $1.65 billion net of cash received in March 2021; its preliminary purchase-price allocation includes $928 of goodwill. It also acquired Green Motion for $105, including contingent consideration, and a 50% stake in HuanYu High Tech. The Cobham Mission Systems acquisition, for $2.83 billion, was expected to close at the beginning of Q4 2021, subject to customary conditions.
- COVID-19 continued to affect select markets and industries, particularly commercial aviation. Eaton reported that its plants generally remained operational and that it used cost controls and restructuring actions to address market conditions.
- The filing identifies risks including changing end-market demand, customer and supplier conditions, pricing and input costs, acquisition integration, litigation, regulation, interest rates, taxes, currency movements and the pandemic. Eaton said legal matters, including historic asbestos claims, were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Management reported no material change in market-risk exposures since year-end 2020, no material change to the risk factors in the 2020 Form 10-K, and effective disclosure controls as of March 31, 2021.
Most important facts for investors to verify
- Whether Hydraulics closed on the expected timetable and the resulting cash proceeds and financial effects.
- Completion, financing and integration of the Cobham Mission Systems acquisition and the performance of the recently acquired businesses.
- Progress against the restructuring plan’s remaining charges and projected $200 mature-year savings.
- Whether Aerospace demand and eMobility profitability improve, and whether strength in other segments persists.
- Cash conversion after the pension contribution, acquisition spending and increased debt, alongside liquidity and covenant compliance.
- Effects of the preliminary Tripp Lite purchase-price allocation and contingent consideration for Green Motion as estimates are finalized.