Eaton Corporation plc — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Dollar amounts are in millions, except per-share data. Eaton is a global power-management company reporting six segments: Electrical Americas, Electrical Global, Hydraulics, Aerospace, Vehicle and eMobility.
Financial performance
| Metric | Q3 2020 | Q3 2019 | First 9 months 2020 | First 9 months 2019 |
|---|---|---|---|---|
| Net sales | $4,526 | $5,314 | $13,171 | $16,152 |
| Gross profit | $1,475 | $1,802 | $3,941 | $5,370 |
| Gross margin | 32.6% | 33.9% | 29.9% | 33.2% |
| Net income attributable to Eaton shareholders | $446 | $601 | $935 | $1,759 |
| Diluted EPS | $1.11 | $1.44 | $2.31 | $4.16 |
| Adjusted diluted EPS (non-GAAP) | $1.18 | $1.52 | $2.97 | $4.30 |
Q3 sales fell 15% year over year, including a 9% decline in organic sales; nine-month sales fell 18%, including a 13% organic decline. Management attributed the contraction mainly to COVID-19 and lower volumes. Nine-month GAAP results included a $221 pretax ($91 after-tax, or $0.22 per share) gain on the Lighting sale. Adjusted results exclude specified acquisition, divestiture and restructuring items.
Cash flow: Nine-month operating cash flow was $2,001, versus $2,514 in 2019. Capital expenditures were $291, making operating cash flow less capital expenditures $1,710 (calculated), compared with $2,073 in 2019. Investing activities provided $709, including $1,408 proceeds from the Lighting sale; financing activities used $2,619. Cash ended the period at $429, with short-term investments of $334.
Balance sheet and liquidity: At September 30, total debt was approximately $8,201, including $2 short-term debt, $1,251 current long-term debt and $6,948 long-term debt. Current assets were $8,671 and current liabilities $5,805. Eaton reported no borrowings under its $2,000 revolving credit facilities, said it remained able to access commercial paper markets, and reported compliance with debt covenants. Management stated liquidity and capital-market access were adequate for operating needs and scheduled debt payments.
Material changes and segment trends
- Q3 net income attributable to shareholders declined 26%; nine-month net income declined 47%. Nine-month adjusted EPS declined 31% year over year.
- Electrical Americas Q3 sales declined 17%, largely reflecting the Lighting divestiture, while its operating margin rose to 22.2% from 19.4%, supported by mix, organic growth and cost controls.
- Electrical Global sales declined 8% and margin fell to 16.6% from 19.4%; Hydraulics sales declined 15% with margin flat at 9.8% (helped by suspension of depreciation while held for sale).
- Aerospace sales declined 13% and margin fell to 18.5% from 24.7%, primarily due to commercial aviation weakness. Vehicle sales declined 25% and margin fell to 14.0% from 18.3%. eMobility sales were flat, but the segment recorded a $2 operating loss.
- Share repurchases totaled $1,464 in the first nine months; dividends paid were $884. Eaton repurchased 15.9 million shares under its authorization during the period.
Outlook, transactions and risks
- COVID-19: Management said the pandemic continued to depress demand and could also adversely affect Q4 results; recovery in several markets was expected to take time. Commercial aerospace, oil and gas, NAFTA Class 8 trucks, and North American and European light vehicles were identified as particularly affected markets. The filing provides no specific full-year earnings guidance.
- Restructuring: A multi-year cost-reduction program incurred $197 in charges in the first nine months of 2020. Total program charges are estimated at $280, with further charges expected in Q4 2020, 2021 and 2022. Management expects mature-year savings of $200 when fully implemented in 2023.
- Divestitures and acquisitions: Lighting was sold in March 2020 for $1.4 billion cash. The Hydraulics business was classified as held for sale; its announced $3.3 billion cash sale to Danfoss was subject to customary conditions and regulatory approvals and was expected to close by the end of Q1 2021. Eaton acquired Power Distribution, Inc. in February 2020.
- Contingencies and other risks: Eaton faces ordinary-course legal matters, including asbestos claims; management did not expect them to have a material adverse effect on the consolidated financial statements. The filing identifies COVID-19 duration and economic recovery, market demand, customer and supplier conditions, competition, costs, acquisitions and divestitures, regulation, taxes, currency and other factors as risks. It reported no material change in market-risk exposures since year-end 2019.
Key facts for investors to verify
- Whether COVID-19-related volume and margin pressure persists, particularly in commercial aerospace, vehicles and industrial markets.
- Progress, total costs and realization of the restructuring program’s projected $200 mature-year savings.
- Completion timing and final proceeds for the Hydraulics sale, and its effect on continuing operations and cash generation.
- Underlying performance excluding the Lighting gain, restructuring charges and acquisition/divestiture items; review the company’s non-GAAP reconciliations.
- Debt maturities, liquidity and cash deployment, including share repurchases and dividends.