Eaton Corporation plc — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Eaton is a global power-management company. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $5,223 | $5,492 | -5% |
| Gross profit | $1,630 | $1,634 | Approximately flat |
| Gross margin | 31.2% | 29.8% | +1.4 percentage points |
| Income before tax | $505 | $453 | +11% |
| Net income | $467 | $441 | +6% |
| Net income attributable to Eaton shareholders | $466 | $439 | +6% |
| Diluted EPS | $0.99 | $0.92 | +8% |
| Operating earnings, non-GAAP | $473 | $483 | -2% |
| Operating earnings per share, non-GAAP | $1.01 | $1.01 | Flat |
Management attributed the sales decline to a 6% currency-translation headwind, partly offset by 1% organic growth, particularly in North America. Gross-margin improvement reflected higher organic volumes and efficiency actions. The effective tax rate was 8%, versus 3%, primarily because more income was earned in higher-tax jurisdictions, including the United States.
Segments and material changes
- Electrical Products: Sales $1,691, down 2%; reported operating profit $260, up 4%. Before integration charges, profit was $266 versus $279, with margin down to 15.7% from 16.2%, reflecting unfavorable mix and Canadian exchange effects.
- Electrical Systems and Services: Sales $1,448, down 5%; reported operating profit $186, up 10%. Before integration charges, profit declined 3% to $189; margin rose to 13.1% from 12.8% on efficiency improvements. Organic sales fell 1%, partly due to fewer large projects in the Americas.
- Hydraulics: Sales $665, down 15%; reported operating profit $66, down 39%. Before integration charges, margin fell to 10.1% from 14.3%, amid weak agricultural and China construction-equipment markets, lower volume, unfavorable mix and restructuring costs.
- Aerospace: Sales $464, flat; operating profit $77, up 24%. Organic growth of 8%, led by aftermarket and commercial OEM demand, was offset by divestiture and currency effects; margin improved to 16.6% from 13.4%.
- Vehicle: Sales $955, down 4%; operating profit $164, up 9%. Organic sales grew 4%, supported by North American truck and automotive demand; margin increased to 17.2% from 15.2%.
Acquisition integration charges were $11 before tax ($7 after tax; $0.02 per diluted share), versus $66 before tax ($44 after tax; $0.09 per share) a year earlier. Cooper integration initiatives were expected to continue through 2015. Eaton acquired UK safety-technology manufacturer Oxalis Group Ltd. in January 2015. The 2014 sale of two aerospace businesses generated a previously reported $154 pretax gain.
Cash flow, balance sheet and liquidity
- Operating cash flow was $77, compared with $12. Pension and postretirement contributions totaled $232, down from $284; working-capital changes used $372 of cash.
- Investing activities used $53, versus providing $304, primarily reflecting lower net sales of short-term investments and $38 paid for acquisitions. Capital expenditures were $105.
- Financing activities used $127, versus $443. The quarter included $266 of borrowing proceeds, $251 of dividends paid and $170 of share repurchases. Cash decreased $118 to $663.
- At March 31, cash and short-term investments totaled $802, versus $1,026 at year-end. Total debt, including short-term debt and current maturities, was $9,340, versus $9,034. Total assets were $32,696 and shareholders’ equity was $15,210.
- Current assets were $7,940 and current liabilities $5,666. Eaton reported no borrowings under its $2 billion revolving credit facilities, compliance with debt covenants, and access to liquidity it believes is sufficient for operating needs and scheduled debt payments.
- Dividends declared were $0.55 per share, up from $0.49. Eaton repurchased 2.4 million shares for $170 under its repurchase program.
Outlook, risks and unusual items
The filing provides no specific earnings or sales guidance. Management noted continued Cooper integration work and described capital expenditures and restructuring charges as subjects of forward-looking statements. It cited risks including market and customer downturns, competitive and cost pressures, acquisition integration, litigation, tax exposure, interest rates, currency fluctuations and broader economic conditions. Management reported no material change in risk factors from the 2014 Form 10-K and no material change in market-risk exposures since year-end.
Currency translation and related hedging produced a $720 other-comprehensive loss; total comprehensive loss attributable to Eaton shareholders was $168 despite positive net income. Goodwill declined by $345, primarily from $367 of translation adjustments, partly offset by additions. A Brazilian litigation matter had a recorded accrual of 85 million Brazilian reais, equivalent to approximately $26; the company expected any payment not to exceed the recorded liability. Eaton said its broader legal matters were not expected to have a material adverse effect. The company was evaluating the impact of the new revenue-recognition standard and could not yet estimate it.
Key facts for investors to verify
- Whether organic growth offsets continued foreign-currency pressure, especially across weaker Hydraulics markets and project-driven businesses.
- Whether higher gross margin and segment efficiency gains persist, and whether Hydraulics margins recover.
- Cash conversion and working-capital trends, given $77 of operating cash flow and a $372 working-capital cash use.
- Debt maturities, refinancing needs and liquidity as cash and short-term investments declined and reported debt increased.
- Progress on Cooper integration, restructuring actions, the Brazilian litigation appeal and the eventual effect of the revenue-recognition standard.