Eaton Reports Fourth Quarter Earnings per Share of $1.46, Up 13 Percent Over the Fourth Quarter of 2017, Excluding 2017 Income Related to the U.S. Tax Bill
This represents an increase of 13 percent over the fourth quarter of 2017, excluding the $62 million of income in the fourth quarter of 2017 related to the U.S. tax bill.
Power management company Eaton Corporation plc (NYSE:ETN) today
announced that earnings per share were $1.46 for the fourth quarter of
2018. This represents an increase of 13 percent over the fourth quarter
of 2017, excluding the $62 million of income in the fourth quarter of
2017 related to the U.S. tax bill.
Sales in the fourth quarter of 2018 were $5.5 billion, up 5 percent over
the same period in 2017. The sales increase consisted of 7 percent
growth in organic sales, partially offset by 2 percent negative currency
translation.
Craig Arnold, Eaton chairman and chief executive officer, said, “We had
a very strong fourth quarter, with better-than-expected organic revenue
growth and margins. Organic growth came in at 7 percent, 1 percent
higher than our guidance. Our segment margins in the fourth quarter were
17.4 percent, 20 basis points above the midpoint of our margin guidance
and 100 basis points over the fourth quarter of 2017.
“Operating cash flow in the fourth quarter, excluding the $300 million
payment for the arbitration decision related to the legacy Cooper
business, was $1.1 billion,” said Arnold. “We took advantage of the
significant pullback in financial markets in December and repurchased
$700 million of our shares in the fourth quarter. This represents 2.3
percent of our shares outstanding at the start of the quarter. We intend
to continue taking advantage of any periods of share price weakness to
buy our shares back.”
For full year 2018, sales were $21.6 billion, 6 percent higher than
2017. Segment margins were 16.8 percent, up 100 basis points over 2017.
Earnings per share were $4.91, and excluding the impact of the
arbitration decision, earnings per share were $5.39. This represents an
increase of 16 percent over 2017, excluding the 2017 gain on the Eaton
Cummins joint venture and the 2017 income related to the U.S. tax bill.
Operating cash flow in 2018 was $3.0 billion, excluding the $300 million
arbitration payment related to the legacy Cooper business. During 2018,
share repurchases totaled 17.5 million shares, at a cost of $1.3
billion, representing 4.0 percent of shares outstanding at the beginning
of the year.
“Looking at 2019, we expect our organic revenues to grow between 4 and 5
percent, partially offset by approximately 1 percent from negative
currency translation,” said Arnold. “We anticipate segment margins to be
between 17.0 percent and 17.4 percent, representing at the midpoint a 40
basis point improvement over 2018.
“We expect 2019 earnings per share to be between $5.70 and $6.00,
representing at the midpoint a 9 percent increase over 2018 excluding
the 2018 arbitration decision,” said Arnold. “We anticipate earnings per
share for the first quarter of 2019 to be between $1.18 and $1.28, a 12
percent increase at the midpoint over the first quarter of 2018.”
Business Segment Results
Sales for the Electrical Products segment were $1.8 billion, up 3
percent over the fourth quarter of 2017. Organic sales were up 5
percent, partially offset by 2 percent from negative currency
translation. Operating profits were $327 million, up 3 percent over the
fourth quarter of 2017.
“Operating margins in the fourth quarter were 18.2 percent, flat with
2017,” said Arnold. “Orders in the fourth quarter were up 3 percent over
the fourth quarter of 2017, driven by solid growth in both industrial
and residential markets in the Americas.”
Sales for the Electrical Systems and Services segment were $1.6 billion,
up 8 percent over the fourth quarter of 2017. Organic sales were up 10
percent, currency translation was negative 1 percent, and the sale in
2017 of our stake in a small joint venture reduced sales by 1 percent.
Operating profits were a record $268 million, up 19 percent over the
fourth quarter of 2017.
“Operating margins were 16.6 percent, an improvement of 160 basis points
over 2017 and an all-time record,” said Arnold. “Orders in the fourth
quarter were up 12 percent over the fourth quarter of 2017, led by
strong growth in all major end markets in the Americas and in EMEA.”
Hydraulics segment sales were $653 million, up 6 percent over the fourth
quarter of 2017. Organic sales were up 8 percent, partially offset by 2
percent from negative currency translation. Operating profits in the
fourth quarter were $85 million, up 15 percent over the fourth quarter
of 2017.
“Operating margins in the quarter were 13.0 percent, an improvement of
90 basis points over 2017,” said Arnold. “Orders in the fourth quarter
decreased 4 percent from the fourth quarter of 2017, driven by a decline
in EMEA similar to what we saw in the second and third quarters.”
Aerospace segment sales were $497 million, up 13 percent over the fourth
quarter of 2017, all coming from organic sales growth. Operating profits
in the fourth quarter were an all-time record $114 million, up 30
percent over the fourth quarter of 2017.
“Operating margins in the quarter were 22.9 percent, 290 basis points
over 2017, an all-time record,” said Arnold. “Orders in the quarter were
up 17 percent over the fourth quarter of 2017. We saw particular
strength in orders for commercial transports, military fighters, and
both commercial and military aftermarkets.”
The Vehicle segment posted sales of $821 million, down 2 percent from
the fourth quarter of 2017, entirely driven by negative currency
translation. Operating profits in the fourth quarter were $147 million,
up 4 percent over the fourth quarter of 2017.
“Our revenue growth in Vehicle was affected by revenues transferring
over to the Eaton Cummins joint venture. The joint venture’s revenues
grew 45 percent in the fourth quarter of 2018,” said Arnold. “Operating
margins for Vehicle in the quarter were 17.9 percent, an improvement of
90 basis points over 2017.”
eMobility segment sales were $80 million, up 10 percent over the fourth
quarter of 2017. Organic sales were up 11 percent, partially offset by 1
percent from negative currency translation. Operating profits in the
fourth quarter were $9 million, down 10 percent from the fourth quarter
of 2017 due to increased R&D investments.
“Operating margins in the quarter were 11.3 percent,” said Arnold. “We
continue to make good progress in new product development and we are
ahead of most of the 2018 year-end objectives we had set for eMobility.”
Eaton is a power management company with 2018 sales of $21.6 billion. We
provide energy-efficient solutions that help our customers effectively
manage electrical, hydraulic and mechanical power more efficiently,
safely and sustainably. Eaton is dedicated to improving the quality of
life and the environment through the use of power management
technologies and services. Eaton has approximately 99,000 employees and
sells products to customers in more than 175 countries. For more
information, visit Eaton.com.
Notice of conference call: Eaton’s conference call to discuss its
fourth quarter results is available to all interested parties as a live
audio webcast today at 10 a.m. United States Eastern Time via a link on
Eaton’s home page. This news release can be accessed under its headline
on the home page. Also available on the website prior to the call will
be a presentation on fourth quarter results, which will be covered
during the call.
This news release contains forward-looking statements concerning first
quarter and full-year 2019 earnings per share, organic revenue growth,
and segment margins, as well as anticipated share repurchases. These
statements should be used with caution and are subject to various risks
and uncertainties, many of which are outside the company’s control. The
following factors could cause actual results to differ materially from
those in the forward-looking statements: unanticipated changes in the
markets for the company’s business segments; unanticipated downturns in
business relationships with customers or their purchases from us;
competitive pressures on sales and pricing; unanticipated changes in the
cost of material and other production costs, or unexpected costs that
cannot be recouped in product pricing; the introduction of competing
technologies; unexpected technical or marketing difficulties; unexpected
claims, charges, litigation or dispute resolutions; strikes or other
labor unrest; natural disasters; the performance of recent acquisitions;
unanticipated difficulties integrating acquisitions; new laws and
governmental regulations; interest rate changes; changes in tax laws or
tax regulations; stock market and currency fluctuations; and
unanticipated deterioration of economic and financial conditions in the
United States and around the world. We do not assume any obligation to
update these forward-looking statements.
Financial Results
The company’s comparative financial results for the twelve months ended
December 31, 2018 are available on the company’s website, www.eaton.com.
| EATON CORPORATION plc | ||||||||||||||||
| CONSOLIDATED STATEMENTS OF INCOME | ||||||||||||||||
|
Three months ended |
Year ended |
|||||||||||||||
| (In millions except for per share data) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Net sales | $ | 5,459 | $ | 5,213 | $ | 21,609 | $ | 20,404 | ||||||||
| Cost of products sold | 3,670 | 3,535 | 14,511 | 13,756 | ||||||||||||
| Selling and administrative expense | 869 | 857 | 3,548 | 3,526 | ||||||||||||
| Research and development expense | 145 | 144 | 584 | 584 | ||||||||||||
| Interest expense - net | 66 | 65 | 271 | 246 | ||||||||||||
| Gain on sale of business | — | — | — | 1,077 | ||||||||||||
| Arbitration decision expense | — | — | 275 | — | ||||||||||||
| Other (income) expense - net | (17 | ) | (23 | ) | (4 | ) | 1 | |||||||||
| Income before income taxes | 726 | 635 | 2,424 | 3,368 | ||||||||||||
| Income tax expense | 94 | 1 | 278 | 382 | ||||||||||||
| Net income | 632 | 634 | 2,146 | 2,986 | ||||||||||||
| Less net income for noncontrolling interests | (1 | ) | — | (1 | ) | (1 | ) | |||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 631 | $ | 634 | $ | 2,145 | $ | 2,985 | ||||||||
| Net income per share attributable to Eaton ordinary shareholders | ||||||||||||||||
| Diluted | $ | 1.46 | $ | 1.43 | $ | 4.91 | $ | 6.68 | ||||||||
| Basic | 1.46 | 1.44 | 4.93 | 6.71 | ||||||||||||
| Weighted-average number of ordinary shares outstanding | ||||||||||||||||
| Diluted | 432.4 | 443.3 | 436.9 | 447.0 | ||||||||||||
| Basic | 429.9 | 440.3 | 434.3 | 444.5 | ||||||||||||
|
Reconciliation of net income attributable to Eaton ordinary |
||||||||||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 631 | $ | 634 | $ | 2,145 | $ | 2,985 | ||||||||
| Excluding acquisition integration charges (after-tax) | — | 1 | — | 2 | ||||||||||||
| Adjusted earnings | $ | 631 | $ | 635 | $ | 2,145 | $ | 2,987 | ||||||||
|
Net income per share attributable to Eaton ordinary shareholders - diluted |
$ | 1.46 | $ | 1.43 | $ | 4.91 | $ | 6.68 | ||||||||
|
Excluding per share impact of acquisition integration charges (after-tax) |
— | — | — | — | ||||||||||||
| Adjusted earnings per ordinary share | $ | 1.46 | $ | 1.43 | $ | 4.91 | $ | 6.68 | ||||||||
See accompanying notes.
| EATON CORPORATION plc | ||||||||||||||||
| BUSINESS SEGMENT INFORMATION | ||||||||||||||||
|
Three months ended |
Year ended |
|||||||||||||||
| (In millions) | 2018 | 2017 | 2018 | 2017 | ||||||||||||
| Net sales | ||||||||||||||||
| Electrical Products | $ | 1,797 | $ | 1,750 | $ | 7,124 | $ | 6,917 | ||||||||
| Electrical Systems and Services | 1,611 | 1,498 | 6,024 | 5,666 | ||||||||||||
| Hydraulics | 653 | 614 | 2,756 | 2,468 | ||||||||||||
| Aerospace | 497 | 441 | 1,896 | 1,744 | ||||||||||||
| Vehicle | 821 | 837 | 3,489 | 3,326 | ||||||||||||
| eMobility | 80 | 73 | 320 | 283 | ||||||||||||
| Total net sales | $ | 5,459 | $ | 5,213 | $ | 21,609 | $ | 20,404 | ||||||||
| Segment operating profit | ||||||||||||||||
| Electrical Products | $ | 327 | $ | 318 | $ | 1,311 | $ | 1,233 | ||||||||
| Electrical Systems and Services | 268 | 225 | 896 | 770 | ||||||||||||
| Hydraulics | 85 | 74 | 370 | 288 | ||||||||||||
| Aerospace | 114 | 88 | 398 | 332 | ||||||||||||
| Vehicle | 147 | 142 | 611 | 541 | ||||||||||||
| eMobility | 9 | 10 | 44 | 50 | ||||||||||||
| Total segment operating profit | 950 | 857 | 3,630 | 3,214 | ||||||||||||
| Corporate | ||||||||||||||||
| Amortization of intangible assets | (93 | ) | (100 | ) | (382 | ) | (388 | ) | ||||||||
| Interest expense - net | (66 | ) | (65 | ) | (271 | ) | (246 | ) | ||||||||
| Pension and other postretirement benefits income (expense) | 3 | (7 | ) | (1 | ) | (45 | ) | |||||||||
| Gain on sale of business | — | — | — | 1,077 | ||||||||||||
| Arbitration decision expense | — | — | (275 | ) | — | |||||||||||
| Other corporate expense - net | (68 | ) | (50 | ) | (277 | ) | (244 | ) | ||||||||
| Income before income taxes | 726 | 635 | 2,424 | 3,368 | ||||||||||||
| Income tax expense | 94 | 1 | 278 | 382 | ||||||||||||
| Net income | 632 | 634 | 2,146 | 2,986 | ||||||||||||
| Less net income for noncontrolling interests | (1 | ) | — | (1 | ) | (1 | ) | |||||||||
| Net income attributable to Eaton ordinary shareholders | $ | 631 | $ | 634 | $ | 2,145 | $ | 2,985 | ||||||||
See accompanying notes.
| EATON CORPORATION plc | |||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | |||||||||
|
December 31, |
December 31, |
||||||||
| (In millions) | |||||||||
| Assets | |||||||||
| Current assets | |||||||||
| Cash | $ | 283 | $ | 561 | |||||
| Short-term investments | 157 | 534 | |||||||
| Accounts receivable - net | 3,858 | 3,943 | |||||||
| Inventory | 2,785 | 2,620 | |||||||
| Prepaid expenses and other current assets | 507 | 679 | |||||||
| Total current assets | 7,590 | 8,337 | |||||||
| Property, plant and equipment - net | 3,467 | 3,502 | |||||||
| Other noncurrent assets | |||||||||
| Goodwill | 13,328 | 13,568 | |||||||
| Other intangible assets | 4,846 | 5,265 | |||||||
| Deferred income taxes | 293 | 253 | |||||||
| Other assets | 1,568 | 1,698 | |||||||
| Total assets | $ | 31,092 | $ | 32,623 | |||||
| Liabilities and shareholders’ equity | |||||||||
| Current liabilities | |||||||||
| Short-term debt | $ | 414 | $ | 6 | |||||
| Current portion of long-term debt | 339 | 578 | |||||||
| Accounts payable | 2,130 | 2,166 | |||||||
| Accrued compensation | 457 | 453 | |||||||
| Other current liabilities | 1,814 | 1,872 | |||||||
| Total current liabilities | 5,154 | 5,075 | |||||||
| Noncurrent liabilities | |||||||||
| Long-term debt | 6,768 | 7,167 | |||||||
| Pension liabilities | 1,304 | 1,226 | |||||||
| Other postretirement benefits liabilities | 321 | 362 | |||||||
| Deferred income taxes | 349 | 538 | |||||||
| Other noncurrent liabilities | 1,054 | 965 | |||||||
| Total noncurrent liabilities | 9,796 | 10,258 | |||||||
| Shareholders’ equity | |||||||||
| Eaton shareholders’ equity | 16,107 | 17,253 | |||||||
| Noncontrolling interests | 35 | 37 | |||||||
| Total equity | 16,142 | 17,290 | |||||||
| Total liabilities and equity | $ | 31,092 | $ | 32,623 | |||||
See accompanying notes.
EATON CORPORATION plc
NOTES TO THE FOURTH QUARTER 2018
EARNINGS RELEASE
Amounts are in millions of dollars unless indicated otherwise (per share
data assume dilution).
Note 1. NON-GAAP FINANCIAL INFORMATION
This earnings release includes certain non-GAAP financial measures.
These financial measures include adjusted earnings, adjusted earnings
per ordinary share, net income per ordinary share excluding the per
share impact of the arbitration decision expense, net income per
ordinary share excluding the gain on the sale of a business and income
from the 2017 United States (U.S.) tax bill, net income per ordinary
share excluding the income from the 2017 U.S. tax bill, operating profit
before acquisition integration charges for each business segment as well
as corporate, and operating cash flows excluding payments for the
arbitration decision, each of which differs from the most directly
comparable measure calculated in accordance with generally accepted
accounting principles (GAAP). A reconciliation of each of these
financial measures to the most directly comparable GAAP measure is
included in this earnings release. Management believes that these
financial measures are useful to investors because they exclude certain
transactions, allowing investors to more easily compare Eaton
Corporation plc's (Eaton or the Company) financial performance period to
period. Management uses this information in monitoring and evaluating
the on-going performance of Eaton and each business segment.
Net income per ordinary share of $4.91 for the year ended December 31,
2018 was $5.39 excluding the $0.48 per share expense from an arbitration
decision related to the legacy Cooper business, which was acquired in
2012 (see Note 2).
During the fourth quarter of 2018 and full year 2018, operating cash
flows of $0.8 billion and $2.7 billion, respectively, would have been
$1.1 billion and $3.0 billion, respectively, excluding the $297 payment
made during the fourth quarter for the arbitration decision.
Net income per ordinary share of $1.43 for the three months ended
December 31, 2017 was $1.29 excluding $0.14 per share of income from the
2017 U.S. tax bill. Net income per ordinary share of $6.68 for the year
ended December 31, 2017 was $4.65 excluding $1.89 per share from the
gain on the sale of the business related to the Eaton Cummins Automated
Transmission Technologies joint venture and $0.14 per share of income
from the 2017 U.S. tax bill.
Note 2. ARBITRATION DECISION
Eaton announced in a press release on August 29, 2018 that certain
subsidiaries it acquired in the 2012 acquisition of Cooper Industries
have been ordered to pay $293 by an arbitration panel. The panel’s
award, issued on August 23, 2018, is related to claims brought by
Pepsi-Cola Metropolitan Bottling Company, Inc. (“Pepsi”).
As Eaton previously disclosed, the dispute related to Pepsi’s claims
that it was harmed by a 2011 settlement agreement that resolved
litigation Pneumo Abex, LLC had previously brought against various
Cooper entities. The litigation involved, among other things, a guaranty
related to Pneumo Abex’s friction products business. Pepsi claimed that
the value contributed to Pneumo Abex and a newly established trust in
exchange for a release of the guaranty was substantially below
reasonably equivalent value, and that an inability of Pneumo Abex to
satisfy future liabilities may result in plaintiffs suing Pepsi under
various theories. There are no other pending claims related to the
contributions made for the release of the guaranty.
A Texas state court confirmed the arbitration award at the confirmation
hearing, which was held on October 12, 2018. On November 2, 2018, the
Company appealed. On November 28, 2018, the Company paid $297, the full
judgment plus accrued post-judgment interest, to Pneumo Abex and
preserved its rights, including to pursue the appeal, which is pending.
The impact of the arbitration award was an after-tax expense of $206 in
the third quarter 2018, reducing 2018 earnings per share by $0.48.
Note 3. ACQUISITION INTEGRATION CHARGES
Eaton incurs integration charges related to acquired businesses. A
summary of these charges follows:
| Operating profit | |||||||||||||||||||||||
| Acquisition | Operating profit | excluding acquisition | |||||||||||||||||||||
| integration charges | as reported | integration charges | |||||||||||||||||||||
| Three months ended December 31 | |||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
| Business segments | |||||||||||||||||||||||
| Electrical Products | $ | — | $ | 1 | $ | 327 | $ | 318 | $ | 327 | $ | 319 | |||||||||||
| Electrical Systems and Services | — | — | 268 | 225 | 268 | 225 | |||||||||||||||||
| Hydraulics | — | — | 85 | 74 | 85 | 74 | |||||||||||||||||
| Aerospace | — | — | 114 | 88 | 114 | 88 | |||||||||||||||||
| Vehicle | — | — | 147 | 142 | 147 | 142 | |||||||||||||||||
| eMobility | — | — | 9 | 10 | 9 | 10 | |||||||||||||||||
| Total business segments | — | 1 | $ | 950 | $ | 857 | $ | 950 | $ | 858 | |||||||||||||
| Corporate | — | — | |||||||||||||||||||||
|
Total acquisition integration charges before income taxes |
— | 1 | |||||||||||||||||||||
| Income taxes | — | — | |||||||||||||||||||||
| Total after income taxes | $ | — | $ | 1 | |||||||||||||||||||
| Per ordinary share - diluted | $ | — | $ | — | |||||||||||||||||||
| Operating profit | |||||||||||||||||||||||
| Acquisition | Operating profit | excluding acquisition | |||||||||||||||||||||
| integration charges | as reported | integration charges | |||||||||||||||||||||
| Year ended December 31 | |||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
| Business segments | |||||||||||||||||||||||
| Electrical Products | $ | — | $ | 4 | $ | 1,311 | $ | 1,233 | $ | 1,311 | $ | 1,237 | |||||||||||
| Electrical Systems and Services | — | — | 896 | 770 | 896 | 770 | |||||||||||||||||
| Hydraulics | — | — | 370 | 288 | 370 | 288 | |||||||||||||||||
| Aerospace | — | — | 398 | 332 | 398 | 332 | |||||||||||||||||
| Vehicle | — | — | 611 | 541 | 611 | 541 | |||||||||||||||||
| eMobility | — | — | 44 | 50 | 44 | 50 | |||||||||||||||||
| Total business segments | — | 4 | $ | 3,630 | $ | 3,214 | $ | 3,630 | $ | 3,218 | |||||||||||||
| Corporate | — | — | |||||||||||||||||||||
| Total acquisition integration charges before income taxes | — | 4 | |||||||||||||||||||||
| Income taxes | — | 2 | |||||||||||||||||||||
| Total after income taxes | $ | — | $ | 2 | |||||||||||||||||||
| Per ordinary share - diluted | $ | — | $ | — | |||||||||||||||||||
Business segment acquisition integration charges in 2017 related to the
integration of Ephesus Lighting, Inc. (Ephesus), which was acquired in
2015. The charges associated with Ephesus were included in Selling and
administrative expense. In Business Segment Information, the charges
reduced Operating profit of the related business segment.
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