Eaton Corporation plc — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. Eaton is an intelligent power management company with five reported operating segments: Electrical Americas, Electrical Global, Aerospace, Vehicle and eMobility. Hydraulics was sold in August 2021.
Financial highlights
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $5,212 | $5,215 | $10,054 | $9,907 |
| Gross profit | $1,706 | $1,670 | $3,280 | $3,178 |
| Gross margin | 32.7% | 32.0% | 32.6% | 32.1% |
| Net income attributable to Eaton shareholders | $601 | $506 | $1,133 | $964 |
| Diluted EPS | $1.50 | $1.26 | $2.82 | $2.40 |
| Adjusted earnings (non-GAAP) | $751 | $690 | $1,400 | $1,267 |
| Adjusted diluted EPS (non-GAAP) | $1.87 | $1.72 | $3.49 | $3.16 |
Q2 net sales were essentially flat year over year; first-half sales grew 1%. Organic sales grew 11% in both periods, offset in reported results by the Hydraulics divestiture and foreign-exchange effects. Q2 net income rose 19% and first-half net income rose 18%; adjusted earnings increased 9% and 10%, respectively. Gross margin improvement reflected organic growth and pricing recovery, partly offset by commodity and logistics inflation.
Cash flow, liquidity and debt
- First-half operating cash flow was $382, down from $897 in 2021, primarily reflecting a $1,144 working-capital cash use as activity grew. Capital expenditures were $254; management expected approximately $650 for full-year 2022.
- First-half investing cash outflow was $822, versus $4,483 in 2021, mainly because acquisition spending fell to $612 from $4,500. Financing cash inflow was $492, compared with $3,453 in 2021. Cash ended June at $364, up $66 from year-end 2021.
- At June 30, cash was $364 and short-term investments were $259. Debt comprised $1,392 short-term debt, $2,030 current long-term debt and $6,277 long-term debt. Total reported debt was $9,699, compared with $8,579 at December 31, 2021.
- Commercial paper outstanding was $1,372. Eaton had no borrowings under its $2.5 billion revolving credit facilities; it reported compliance with debt covenants and stated that available liquidity and capital-market access were sufficient for expected needs.
- First-half dividends paid were $654. The board renewed authorization for up to $5.0 billion of repurchases over three years; $186 of shares were repurchased in the first half, leaving $4,814 available at June 30.
Segments and material changes
- Electrical Americas: Q2 sales rose 15% to $2,131; operating margin increased to 23.2% from 21.3%. First-half sales rose 16% and margin was 21.3%.
- Electrical Global: Q2 sales rose 5% to $1,495 and margin increased to 18.9% from 18.3%. Foreign exchange reduced reported growth; data center, commercial and industrial demand supported organic growth.
- Aerospace: Q2 sales rose 19% to $742 and margin increased to 21.9% from 21.0%, with contributions from organic growth and Mission Systems.
- Vehicle: Q2 sales rose 5% to $708, but operating margin fell to 15.3% from 17.9%, primarily from inflation and supply-chain-related inefficiencies.
- eMobility: Q2 sales rose 55% to $136, including Royal Power Solutions, and operating loss narrowed to $2 from $6.
The company acquired Royal Power Solutions for $612 in January 2022. It recorded a $24 first-half gain from final post-closing adjustments on the Hydraulics sale. In the second quarter, it recorded $29 of charges related primarily to asset write-downs and severance as it decided to exit Russia. Q2 and first-half results also included acquisition/divestiture costs and restructuring charges; reported adjusted earnings exclude specified acquisition/divestiture, restructuring and intangible-amortization items.
Outlook, commentary and risks
- No full-year revenue or earnings guidance is stated in the supplied filing text. Management expected approximately $650 of 2022 capital expenditures, approximately $30 of further 2022 restructuring charges, and total restructuring charges of about $350. Mature-year savings from the program were projected at $250 when fully implemented in 2023.
- Backlog at June 30 was approximately $10.2 billion, with about 87% targeted for delivery within the next twelve months. Backlog includes only orders considered firm under the company’s stated criteria.
- Management cited broad-based demand and pricing recovery, but noted ongoing supply-chain disruptions and shortages, inflation, labor shortages and plant shutdowns associated with lockdowns. The filing warns that inability to recover higher material, energy and labor costs through pricing could materially affect results.
- Other risks include customer and market changes, acquisitions and integration, foreign-exchange and interest-rate movements, geopolitical events and litigation. Eaton stated that legal matters were not expected to have a material adverse effect, while noting uncertain outcomes. Brazilian tax disputes and a U.S. tax appeal remain unresolved; the company said final outcomes could differ from expectations.
- Management reported disclosure controls were effective as of June 30, 2022, and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether working-capital investment and cash conversion improve after first-half operating cash flow declined substantially.
- Whether pricing continues to offset commodity, logistics, labor and supplier-cost inflation without weakening demand or competitiveness.
- How reported growth and margins develop after accounting for the Hydraulics divestiture, acquisitions and foreign-exchange effects.
- Progress integrating Royal Power Solutions and realizing restructuring savings, alongside remaining restructuring and acquisition-related costs.
- Developments in the Brazil and U.S. tax cases, Russia exit costs, and the company’s elevated short-term borrowing and debt maturity profile.