Eaton Corporation plc — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars unless stated otherwise. Eaton is a global power-management company. The quarter included the August 2 sale of its Hydraulics business; results also reflect acquisitions completed during 2021.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $4,923 million | $4,526 million | $14,830 million | $13,171 million |
| Gross profit margin | 32.2% | 32.6% | 32.1% | 29.9% |
| Net income attributable to Eaton shareholders | $629 million | $446 million | $1,593 million | $935 million |
| Diluted GAAP earnings per share | $1.57 | $1.11 | $3.97 | $2.31 |
| Adjusted earnings per share, non-GAAP | $1.75 | $1.35 | $4.91 | $3.47 |
Q3 sales rose 9%, reflecting 8% organic growth, 7% contribution from acquisitions and 1% favorable currency, partly offset by a 7% reduction from the Hydraulics divestiture. Nine-month sales grew 13%, including 11% organic growth, acquisition and currency contributions, and a 4% reduction from Hydraulics and Lighting divestitures.
Reported Q3 net income included a $617 million pretax gain on the Hydraulics sale, or $197 million after tax ($0.49 per diluted share). The gain materially affects comparisons: Q3 GAAP earnings rose 41%, while adjusted earnings rose 29%. Nine-month adjusted earnings increased 40%. Adjusted measures exclude acquisition/divestiture items, restructuring charges and intangible amortization.
Cash flow: Operating cash flow was $1,368 million for the first nine months, versus $2,001 million a year earlier. Capital expenditures were $412 million; operating cash flow less capital expenditures was approximately $956 million. The cash-flow decline reflected higher working capital, taxes paid on the Hydraulics sale and a pension contribution. Investing activities used $1,688 million, including $4.5 billion of acquisition payments, partly offset by $3.1 billion of Hydraulics sale proceeds. Financing activities provided $166 million.
Liquidity and debt: At September 30, cash was $271 million and short-term investments were $389 million. Total reported short- and long-term debt was approximately $9.1 billion, compared with $8.1 billion at year-end 2020. Commercial paper outstanding was $421 million; there were no revolving-facility borrowings. The company reported $2.5 billion of revolving credit facilities and said it had adequate liquidity and was in compliance with debt covenants. A new $2.5 billion facility structure was completed on October 4, 2021, after quarter-end.
Cash dividends declared were $0.76 per share for Q3 and $2.28 per share for the first nine months. Eaton repurchased $122 million of shares during the first nine months.
Material changes and segment results
- Hydraulics divestiture: Sold to Danfoss on August 2 for $3.1 billion net of cash sold; recognized a $617 million pretax gain, subject to post-closing adjustments.
- Acquisitions: Tripp Lite was acquired for $1.65 billion and Cobham Mission Systems (CMS) for $2.80 billion, both net of cash received. Eaton also acquired Green Motion and stakes in two China-based businesses. Acquisition purchase-price allocations remain preliminary. Tripp Lite contributed $283 million of sales and $96 million of segment operating profit from acquisition through September; CMS contributed $252 million and $65 million, respectively.
- Segment trends: Q3 Electrical Americas sales rose 9% and operating margin was 21.7% (22.2% prior year); Electrical Global sales rose 19% and margin improved to 20.1% (16.6%); Aerospace sales rose 38%, substantially reflecting CMS, and margin was 22.0% (18.5%); Vehicle sales rose 12% and margin was 18.0% (14.0%). eMobility sales rose 6%, but its operating loss widened to $8 million from $2 million. Hydraulics Q3 sales were $179 million before the business was sold.
Consolidated Q3 gross margin edged down year over year, primarily due to acquisition and divestiture costs, higher intangible amortization, and commodity and logistics inflation. Nine-month gross margin improved, helped by volume, acquisitions and restructuring savings.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management reported broad-based recovery in most end markets, while noting supply-chain disruption and inflation were affecting many businesses and limiting sales.
- Commercial aviation remained weak because of travel restrictions, particularly international travel. Vehicle and eMobility customers also faced supply constraints and reduced production.
- The multi-year restructuring program is expected to total $320 million in charges, with an additional $33 million expected in 2021 and $10 million in 2022. Projected mature-year savings are $230 million when fully implemented in 2023.
- Firm backlog was approximately $7.3 billion at September 30; Eaton expected to recognize about 87% within the next 12 months. Customer orders subject to future releases are excluded from this backlog measure.
- Tax matters include an IRS appeal concerning 2005–2006 transfer pricing and Brazilian tax assessments. Eaton believes resolution will not materially affect its statements, but cautions that outcomes could differ from expectations. The Brazilian matters require pledged assets and other security.
- Eaton said general legal claims, including asbestos claims, were not expected to have a material adverse effect. It reported no material change in market-risk exposures or risk factors from its 2020 Form 10-K. Disclosure controls were effective; management was evaluating acquired businesses’ effects on internal control.
Important facts for investors to verify
- Separate the Hydraulics sale gain and its tax impact from recurring operating performance when comparing reported earnings.
- Track supply-chain constraints, commodity and logistics inflation, and whether firm backlog converts to sales on the expected timetable.
- Assess acquisition integration, contributions and final purchase-price allocations, particularly for Tripp Lite and CMS.
- Monitor operating cash flow and working-capital needs alongside acquisition spending, debt and liquidity.
- Follow outcomes of the IRS and Brazilian tax disputes, and progress against restructuring charges and projected savings.